The port of Marseille in France. Picture: REUTERS
BERTH PAINS: The port of Marseille in France. Most owners of bulk carriers used to transport commodities are not laying up ships in port, even though freight rates have fallen to record lows amid a slump in Chinese demand for minerals and an expansion of the global fleet. Picture: REUTERS

FOR an industry that is losing money on almost every transaction, commodity shippers are remarkably busy grabbing any cargo they can get their hands on.

From space, where satellites track ship movements, the market appears to be booming. At giant iron ore terminals in Brazil and Australia, millions of tonnes are loaded each month on vessels that come and go like clockwork.

Along the coastlines of China, Singapore and Greece, the picture is the same: little waiting about. 

But that movement is a result of weakness, not strength. Commodity prices and demand are so lousy, freight rates for the biggest ships do not even cover a third of the cost of their crews. While owners would usually idle ships when things slow down, hoping to spark a rebound in rates, the outlook is so dire that many figure it is better to have some business. Otherwise, they risk losing market share and earning nothing.

"It’s a bizarre scenario," said Simon Francis, the founder of G-Ports, a UK-based firm that has been monitoring shipping congestion for a decade.  "There don’t seem to be many waiting around for cargo", even though the industry was "on its knees," he said.

For the first time since the early 1990s, combined trade in coal and iron ore is poised for two consecutive years of contraction, predicts Clarkson Research. Almost every type of commodity carrier will make no profit this year, and will earn nearly nothing next year, according to analysts’ forecasts and industry breakeven figures.

The crisis stems from a shipbuilding boom that doubled the fleet’s capacity in the seven years to the end of last year, and that included a bull market in commodity prices as global demand surged. Owners increased vessel orders when rates rose to a record from 2007-2009, wagering that China’s near double-digit growth at that time would persist. It was a bad bet. Instead, the second-largest economy is expanding at the weakest pace in 25 years.

To deal with the oversupply, ship owners are scuttling older vessels at an unprecedented pace. A record 88 capsized bulkers were broken up last year, and 14 were scrapped in January, according to GMS, which buys ships destined for demolition. It may not be enough. Wrecking yards would have to scuttle more than triple the number of ships scrapped last year to stabilise freight rates, according to Herman Hildan, a shipping-equity analyst at Clarksons Platou Securities in Oslo.

Owners have a choice: leave vessels waiting at major ports or carry on shipping unprofitably. Many are choosing the latter.

Average waiting near Port Hedland in Australia was four days for 80 c apsized ships preparing to load iron ore, data show. Off Brazil, it was five days for 36 vessels. The average wait for vessels near China was two days.

"Delays haven’t really done a lot for months," said Mr Francis, the founder of G-Ports.

To idle carriers, owners can reject cargoes for several days in anticipation of better rates, or lay up vessels for months or years. The longer the inactivity, the more difficult it is to reactivate a ship.

There were few signs that owners were turning away business or waiting out the slump, said Herman Billung, the CEO of Oslo-based Golden Ocean Group, which has a fleet of 70 vessels.

Laying up a ship — removing some of its crew and anchoring it — was a long and sometimes costly process, Mr Billung said.

Owners often borrow ships from one another, either because they are betting on a rates rally or because they have cargoes to cover. When rates fall, such companies need the ships to earn whatever they can to repay the companies that lent the vessels.

"Anything giving a return better than zero makes sense," Mr Billung said. "It’s a big tussle."

The average time-charter return for a capsized ship dipped less than $1,000 a day for the first time yet on February 26, down from a record high of $223,000 in 2008. The daily cost of a crew is about $3,167, and that has exceeded rates every day since January 6, says consultant Moore Stephens.

The future is not looking much better. Mr Hildan said the biggest vessels might not break even again until 2018.

Bloomberg