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Rally in bulk shipping rates attests to China's boom
Goh Eng Yeow Wed, May 21, 2008 The Straits Times
THE relentless climb in a key indicator that tracks shipping rates is a stark sign that China and other Asian economies are booming, despite talk of a global slowdown led by the United States. The indicator - called the Baltic Dry Index - has rocketed to record highs in recent days after halving in value between November and January. The key driver is the huge demand for iron ore in China, said Mr Tan Chin Poh, deputy research head of research house Kelive. China's iron ore imports hit a monthly record of 42.85 million tonnes last month, as its steelmakers boosted stockpiles in anticipation of further price hikes from Australian miners.

The country will need more of everything, from steel to cement, to rebuild the province's damaged infrastructure. This has triggered an escalation in imports of raw materials such as iron ore and coal.

As Sichuan is also China's largest producer of grains, pigs and rapeseed oil, the disruptions caused by the earthquake will hurt domestic supply of food.

And this may produce further upward pressure on the index, as shipping rates surge to cope with rising food imports into China.

'Sure, agricultural commodities may be less important than iron ore, but the strong demand for foodstuff in countries such as China will tighten up the shipping market further,' said a dealer.

The clear beneficiaries from surging freight rates are shipbuilders such as Cosco Corp and Yangzijiang, which already have bulging order books for bulk carriers.

BNP Paribas noted yesterday that Cosco had risen in tandem for the past three trading sessions with the jump in the Baltic Dry Index.

There are simply not enough new ships to enter the market to meet demand, said one trader.

While the commodities markets are in dire need of fresh shipping transport, the credit crunch over the past eight months had undermined orders for new ships.

Because of a tightening credit market, banks have demanded tougher financing terms, causing a rash of cancellations in shipbuilding orders.

And traders do not anticipate the index to show signs of correction any time soon.

'Cancellation of new ship orders will keep freight rates buoyant,' said one dealer.

He anticipated that shippers such as Neptune Orient Lines (NOL) and STX Pan Ocean would benefit from the short supply of vessels.

In the past month, NOL has risen by 22.6 per cent to $3.95, while STX Pan Ocean is up 22.1 per cent at $3.92.

But some traders noted that there was a dearth of research reports to highlight the sharp recovery of the Baltic Dry Index in the past few months and its impact on Asia. This was unlike January, when there were many write-ups agonising over whether the plunge in the index was a reflection of a yet-unrecognised slowdown in Asian economies.

engyeow@sph.com.sg