LONDON: Falls in global grain trade after searing droughts in Russia and the United States will bear down hard on a depressed dry cargo freight market and pile pressure on ship owners, already reeling from a four-year slump.
The seaborne cereal trade accounted for at least 10 percent of total dry bulk commodities transported last year and has traditionally provided a seasonal earnings boost for ship owners.
But the worst US drought in more than half a century and persistent dryness in other major grain-producing countries including Australia is already weighing on cargo business.
"The grains freight market is very depressed at the moment and ship owners are leasing their ships if they can for peanuts just to cover costs," a Europe-based grain trader said.
Fears had grown of a repeat of the unrest and hunger seen in the 2007/08 food crisis as benchmark prices of corn, soybeans and wheat soared this summer.
Food officials are now saying there is no need for panic on the recent spike in global prices, but with lower crop estimates, less grain will be transported.
"The weaker volumes are pushing down freight rates amid oversupply in general. Owners have positioned their vessels to take advantage of the seasonal upswing which is now unlikely to materialize. This is leaving charterers spoiled for choice," said Peter Sand, chief shipping analyst with trade association BIMCO.
The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities and is a bellwether of market sentiment, fell this week to 661 points, its lowest since February's 647 points, which was the biggest drop since 1986.
"If you have a bad market when a better market was expected, not only working capital gets depleted, but also there is emotional distress to compound the anxiety and pain," said Basil Karatzas, chief executive of consultancy and brokerage Karatzas Marine Advisors & Co.
"There is no catalyst in the near future for freight and people are starting to get more serious about selling vessels as you can't afford to keep bleeding cash in this market."
Last month world cereal body the International Grains Council slashed its global trade forecast for wheat and coarse grains in 2012/13 July/June to 249 million tonnes from 269 million in 2011/12.
Grains purchases are traditionally made months in advance, with traders using their market knowledge to calculate whether supplies will be plentiful or tight when the grain has to be bought and ships loaded.
The US government said this week the droughts in the United States and Russia would deplete harvests of wheat, corn and soybeans, even though global food supplies were not as badly hurt as feared.
"The grain season out of the US Gulf starts around this time of year, September-October, and already we are seeing fewer stems coming out of the US Gulf and the explanation is the drought," said Fotini Karamanli, chief executive of Greek dry bulk shipping group Hellenic Carriers.
"It's a very negative development for the panamaxes, the supramaxes and the handysizes as well," said Karamanli, whose fleet ships grain.
Grains are normally transported on panamax class vessels as well as smaller supramax and handysize ships. Average earnings have slid to around $4,000 and $8,000 a day for panamaxes and supramaxes, respectively, versus operating cost levels estimated at $5,600 and $5,100 a day.
"This year, the dry bulk market will benefit much less, if at all, from the traditional surge in US soybean cargoes that normally come flooding into the market," said Jeffrey Landsberg, with US consultancy Commodore Research.
"Only 28.7 million tonnes of US soybeans are expected to be shipped this year, well below the 37 million tons estimated to have been exported last year. This is going to put even more pressure on panamax and supramax rates."
Dry bulk shipping companies ordered large numbers of new vessels between 2007 and 2009, when freight rates hit record highs. But the extra shipping capacity arrived just as economies were slowing down, sending rates tumbling.
The slump, one of the worst ever faced by the sector, has sunk a number of dry bulk firms including Britain's oldest, Stephenson Clarke Shipping Ltd, and one of Italy's top players, Deiulemar Compagnia di Navigazione.
"The main problems now (in dry freight) are linked with supply and very poor sentiment," Karamanli told Reuters.
Iron ore shipments account for just over a third of total seaborne volumes and are typically transported on larger capsize vessels. Coal also accounts for just under a third of total volumes. While demand for those commodities has helped support the larger capsizes, the outlook is still seen tough.
Analysts and traders say more than $150 billion worth of infrastructure projects, including the building of highways and ports, approved by China in recent days are unlikely to provide much relief for shipping in the near-term.
"You can't just turn the tap on with infrastructure investment. You often have to design projects, make calculations. It's not an immediate thing," said Peter Fish, managing director with UK steel consultancy Meps.
FROM: REUTERS
Grain market turmoil hits depressed shipping sector
