Vessel oversupply crashed rates, Baltic Dry Index: SCI

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

The Baltic Dry Index has seen a huge collapse in the last one month of almost 60%. Speaking to CNBC-TV18, S Hajra, chairman and managing director of Shipping Corporation of India says that an oversupply of vessels is what hurt the Index.

He says that the severe winter in EU may aid the shipping business now. He sees the tanker market stabilizing and says that supply will exceed demand for dry bulk transport in 2012.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What is it that explains this huge fall in the Baltic Dry Index and for the industry?

A: Basically, it's the same market dynamics and all the segments of shipping, that is the oversupply, glut of tonnage. See, 2007 was the historic high for ship-ordering, resulting in 2010 being the historic high for ship deliveries. 2011 also, there were plenty of deliveries close to about 75-80% of 2010. Unfortunately, 2012 also will be at the same level. So basically there is over supply of tonnage.

The demand from 2010 onwards again is on the rise unlike in 2009, where after decades, the demand for various commodities including that of oil, oil products had actually fallen. But 2010 onwards, the demand is there for definitely almost all the commodities. It is on a growth track, but unfortunately, the supply growth is much faster than the demand growth. That is why the demand supply equilibrium is getting distorted.

As far as dry bulk is concerned, I have taken the comparative slow down, it is not a de-acceleration, but comparative slow down of the Chinese economy which has been the main catalyst for dry bulk trade because of their huge crude steel production. There, the slight slowdown has also has affected; China is believed to have a huge inventory of iron ore, so for the time being, there was some de-acceleration in the iron ore import into China.

So all this and besides of the Euro zone crisis, the US economy not doing very well, all this has added to the woes of the ship-owner, and therefore, we saw a three-decade low in the Baltic Dry Index which had gone down to about 641. Now it has slowly come back to about 715 which is of course hardly any increase. The dry bulk is still in doldrums. The tanker market is more or less at the same level over the last few months. It's nothing great, but it hasn't gone down either. Maybe the severe winter in Europe may see slight spurt in the crude tanker market because whenever there is a severe winter, the energy demand goes up. That has a positive impact on the tanker market. So it could have some impact going forward.

Q: What went so wrong in January that the rates should have gone this far lower? Is that slowness in iron ore and coal likely to continue for the quarter?

A: Nothing went so dramatically wrong. As far as the charter market is concerned, it also depends on exactly the availability of vessels at the point where the cargo is emanating from, and if there are too many vessels... It happens in every sector, particularly in the charter market, when there are too many VLCCs hanging around in the west Asia gulf which is till today the main point of supply for crude all over the world, then the rates crash because too many ships just chasing too little cargo.

That sort of thing must have happened because the index is nothing but a true reflection of the various charters which are getting fixed all over the world. The situation in the dry bulk is so bad that today possibly a cape-size vessel, a panamax bulkers vessel and a supramax vessel, they are all attracting almost the same rate which is below USD 10000! That is extremely bad, but that's what the situation is because as I said there are too many ships chasing too little cargo.

Even today, the order book at least vis-à-vis tanker and even container it is the worst in dry bulk because still, in various segments, dry bulk order is more than 30% of the existing capacity whereas in tanker it is down to just about 20%. Tanker and dry bulk, the other difficulty is while the growth is there; for tanker it is about 2.5-3% growth which is projected for 2012, for dry bulk it is about 7.5% or there about; the supply growth is projected at nearly 4% for tanker fleet and about 9% plus for dry bulk fleet. At least in the container market, there is some kind of same projection for demand and supply which is likely to grow at little over 9%.

Q: How long will this demand-supply mismatch continue to dodge you, what are the premiums you enjoy in one-year contracts and contracts over one year?

A: Very few ship owners today are wanting to conclude a 1-2 year time charter contract because the market is at its lowest level. So obviously, the charterers are also not fixing even for longer period at rate which is very much beyond today's level. At today's level, no ship owner is almost covering their full cost; at best, they are just covering the operating cost. So many of the ships are not having cash loss, but they are definitely having book loss. So very few ship owners today are interested in fixing 1-2 year time charter because then they are booking upfront loss for 1-2 years.

Going forward also, at least as far as 2012 is concerned, there is not much to cheer as far as ship owners are concerned because in 2012 also deliveries will be almost more or less at the same level as 2011. Therefore, the demand growth will be there but demand growth will still lag behind the supply growth, and therefore, 2012 is going to be as difficult a year for ship owners as 2011. But beyond 2012, the deliveries will really slump in a very big way because since 2009 onwards, the ordering has substantially come down and bulk of the deliveries will get over by end of 2012. So thereafter, hopefully the equilibrium will be restored to some extent and ship owners can look forward to some increase in their rates and charter hires.