Ocean Freight Rates Remain Low

By Dave Gambrel

Table 1: Daily Rental Rates for Capesize and Panamax Vessels, 2014Coal producers seeking to export coal, particularly in Panamax and Handysize vessels, have seen almost six years of steady low ocean freight rates. Slight improvements have occasionally occurred in Capesize rates, almost always driven by sporadic jumps in Chinese iron ore demand. Except for a few short-lived price surges in the winter of 2011-2012 and again in the winter of 2013-2014, daily rental rates for Capesize vessels have struggled to average more than $10,000 per day. As Table 1 shows, 2014 has reported several slightly improved rate bumps, perhaps causing daily rates to average about $15,000. Panamax daily rates, on the other hand, have averaged in the $10,000 range since September 2010 (the last time they exceeded $20,000). These values are dangerously close to what many shipowners would call lay-up cost.

The same vessel that carries coal may also carry grain or iron ore, so a high demand for vessels to carry iron ore or grain may cause a shortage of vessels to carry coal. Thus, the interaction of seemingly unrelated commodities may affect coal rates. According to R.S. Platou Economic Research, a five-year-old 172,000 deadweight-tonnage (dwt) Capesize is currently assessed at a value of about $47 million, and a five-year-old 74,000-dwt Panamax is assessed at a value of about $23 million. Simple mathematics shows why shipowners get concerned when daily rates are so low.

It is interesting to observe that during the “trough” of 2012 rates, Glencore literally paid nothing to hire a dry-bulk ship, with the vessel’s operator paying $2,000 a day of the trader’s fuel costs after freight rates plunged to all-time lows. Glencore chartered the vessel, operated by Global Maritime Investments (GMI). The daily payments lasted the first 60 days of the charter. The vessel hauled a cargo of grains to Europe, putting the carrier in a better position for its next shipment. GMI paid Glencore as the Panamax-sized vessel traveled from near the coast of Yosu, South Korea, to Australia to load grain, reverting to a daily rate linked to a Baltic Exchange index level once the 60 days expired.

Why would any shipowner agree to such a deal? At that time, the excess of vessels in the Pacific drove daily rates to almost record lows, a condition that lasted 10 months before a short-lived surge in Capesize rates provided some hope of relief. GMI’s other option was to stay in the Pacific and earn poor revenues or ballast to the Atlantic and pay the fuel themselves. (Ballasting refers to sailing without a cargo.) Other owners and operators of vessels paid as much as $50,000 a day in fuel to travel to ports to win work, or why they agreed to rates at zero cost as daily rental rates fell to record lows.

Charters for the so-called backhaul routes that reposition ships to the Atlantic Ocean region from the Pacific fell to the lowest since Baltic Dry indexes started. Rents for Capesize ships that haul ore and grain on backhaul routes were at minus $7,342 a day, the lowest since that index began in 1999, Baltic Exchange data shows. Details about the ship hire were included in a list of vessel charters published daily by the Baltic Exchange, the London-based assessor of freight costs.

Table 2: Coal Rates to ARA, 2014COAL RATES
It is a misnomer to talk of rates as if they apply strictly to coal, but we do it because our focus is coal. Charterers, notably coal buyers, tend to look at freight rates on a per-metric-ton basis rather than the daily-rate basis used by shipowners and shipbrokers. A common destination for both Capesize and Panamax vessels is called ARA (Amsterdam-Rotterdam-Antwerp), or simply Rotterdam, in the lingo of the shipping industry. In Table 2, per-metric-ton rates for three major Panamax loading sites and four major Capesize loading sites are shown. Distances to ARA for all those loading sites are also listed.

Several facts may be noted for the Panamax vessels: same origins rates ran $2.25-$2.65 higher than Capesize, and U.S. Gulf rates ran a disproportionate $1.85 higher than Puerto Bolivar rates. This rate differential may be due to the fact that the initial steaming for U.S. Gulf vessels is on the Mississippi River, where slow travel is combined with very high pilotage fees to cost the shipowner more than a trip originating in Puerto Bolivar.

By contrast, Capesize loadings at Hampton Roads, Puerto Bolivar and Richards Bay, South Africa, yielded per-ton rates that were very close to each other, even though Hampton Roads is much closer than the other two. Newcastle (Australia) vessels have to transit the Suez Canal, pay high canal tolls, and travel 8,222 miles farther than Hampton Roads vessels, yet their rates were only $1.55 per ton higher. This hardly seems fair to Hampton Roads shippers, but it illustrates the effect of supply and demand on prices. In the Pacific market, there are far more ships available than needed, so the shipowners have to compete through low prices.

The shipping industry has always been volatile and the demand for ships tends to vary with world trade. Thus, occasionally ship operators will find that they are unable to employ their vessels profitably, and must consider the decision to remove them from service. During the daily rental highs (higher than $150,000) of 2008, pricing euphoria was so great that new Capesize and Panamax vessel orders shot through the ceiling, compounded by the order of 35 Valemax vessels at 400,000 tons per copy. In a very short period of time, there was an excess of dry bulk vessels on the market, particularly in the Pacific.

It may be that the owner has a reasonable expectation that demand will quickly recover, so will merely find a suitable anchorage and keep the vessel fully functioning and ready for employment, with her crew aboard. That state can be described as “warm” lay-up. It is not as simple as it sounds, because even the “suitable anchorage” requirement is not easy. Owners will avoid lay-up like the plague, much as a coal miner will avoid a decision to park a $30 million dragline indefinitely.

Even so, the owner might view the market less optimistically and decide to take the vessel out of service for a period of months, or even years, until demand is restored and the vessel will be put in “cold lay-up.” Once this was a relatively simple procedure, with a ship having found a safe and sheltered mooring or cheap lay-up berth and effectively shut down with a couple of watchmen to see to security, sound the bilges and keep the vessel safe.

Modern ships are more complex and if they were merely shut down and left, would swiftly deteriorate. The mass of electronics and delicate machinery aboard will require the maintenance of a benign, dehumidified climate, while modern machinery will require regular rotation, so that the lubrication does not emigrate downward and leave the upper parts unprotected. Ideally, a skeleton crew to maintain the vessel’s basic services will be kept aboard. Possibly, if a number of sisters are being laid up, the crew will be able to maintain the most optimum conditions aboard a number of ships “rafted” up together, or on adjacent berths. Large vessels may require as many as 10 people to comprise a skeleton crew.

It may be necessary to physically remove some of the vessel’s computers and other electronic equipment to a place where they will not deteriorate and can be maintained. Software, too, may need regular updating to avoid the ship, when she is eventually reactivated, being filled with redundant equipment or electronics that fail to operate. This is actually a more likely consequence of lay-up than many mechanical equipment failures.

Cold lay-up of a modern ship also presupposes a more “controlled” condition than “warm” lay-up, with some sort of power supply to be maintained, providing electricity for whatever climate control equipment is fitted. Preparation for lay-up is a much more demanding exercise if it is done properly, ensuring that anything prone to corrosion is protected, that equipment does not seize up through non-use and that proper arrangements are made to lubricate machinery.

It is perhaps not surprising that many owners elect to keep their vessels operational, or at least capable of reactivation in the short term, rather than effectively “put the ship to sleep,” with all the complexities that this entails. It is notable that compared to the shipping recession of the 1980s, when huge numbers of ships were laid up inactive for years; relatively few vessels were put into cold lay-up after demand dipped following the onset of the 2008 financial crisis. Slow steaming, it seems, has been a useful alternative.

Dave Gambrel is the owner and chief consultant of Logisticon Inc. He has chartered more than 50 vessels of Panamax and Capesize capacity, and has consulted with ship brokers on the carriage of coal. He can be reached at [email protected]