The Chinese economy, which buys almost half the world’s coal and ore cargoes, will grow in 2015 at the slowest pace in 25 years, economists’ forecasts compiled by Bloomberg show.
While the fall in the index is proving to be beneficial for India’s coal and fertiliser importers such as NTPC, Adani Power, Tata Steel and Steel Authority of India, among others, it is a major drag for shipping companies as lower freight rates hurt their revenue stream. For shipping companies to even break even, the Baltic Dry Index needs to be at least at 3,500 levels.
Coal in India is mainly imported from Richard Bay in South Africa, Australia and Indonesia. Overall coal freights have declined to 25% in the last two months, said the official.
“There is certainly a benefit for the chartering companies, those that are on time charter, but the extent of the benefit depends on the nature of contract they have moved into for the imports,” the executive said.
Chartering companies on spot contracts will benefit the most compared with those that are into long-term contracts which run for a year or more or even the short-term deals which are usually for two-three months.
Chartering companies are those which may export or import cargo either by themselves hiring a vessel from shipping companies or by appointing a shipbroker to find a ship to deliver the cargo.
Exporters of rice and basmati will also benefit from this index fall. In the year ended March, India exported rice and wheat worth $ 9.6 billion.
That should be bad news for shipping companies. “2015 does not seem like a good year for the industry in terms of freight rates. Even if China reopens after their New Year, the pick-up in trade is going to remain moderate and nothing rosy,” said Anoop Sharma, CEO – Sea Transportation Business with Essar Shipping.
“This is the lowest level we have seen ever. Apart from falling commodity and crude oil prices, the drop in the index has come because of too many ships on water,” said an executive from J.M. Baxi & Sons, the country’s leading shipping agent.
The current freight rates are not allowing companies to recover even their operating costs, said industry executives. “The situation is getting worse for shipping companies. Forget the debt servicing, companies are unable to recover operating costs. We don’t see any light at the end of the tunnel as of now. If the situation prevails, we may see companies shut down,” said an executive of Link Shipping & Management System.
“Though broadly, a 3,500 index level is seen as break-even point, a lot also depends on the fleet utilisation (whether in spot or long-term contract) by the shipping companies,” said an analyst with a local brokerage. “The more the contract renewals at this juncture, the adverse will be the situation for the shipping company as contracts will get locked at much lower rates,” he said.
For instance, Shipping Corporation of India is worse positioned as out of its 17 bulk vessels, two are in mid-term (three month) and 15 in spot market. Essar Shipping on the other hand has a 50:50 break up between spot and long-term with long-term contract varying between 2-5 years.