Thursday, September 12, 2013

Dry-Bulk Shipping Rates Rise on China Demand

Dry-Bulk Shipping Rates Rise on China Demand
Climb in Baltic Dry Index Lifts Hope of Commodities Recovery

LONDON—A sudden surge in China's demand for iron ore has helped push global shipping freight rates to their highest level in more than 18 months, raising hopes that a recent downturn in some commodity prices is nearing an end.

The Baltic Dry Index, which tracks global freight rates for ships carrying dry-bulk commodities such as coal, iron ore and grain, finished Wednesday up 4.6% and at its highest closing since January 2012. It has risen 36% this month alone.

As a proxy for global demand for raw materials, the index is often considered a predictor of economic growth around the world. This time, however, analysts warned about reading too much into the latest jump, saying it was largely driven by a rebound in Chinese demand.

Data showing slowing growth in China sent prices for commodities from copper to coal tumbling earlier this year. More recently, activity in the world's second-biggest economy has shown signs of picking up. Its commodities imports have soared as Chinese companies have taken advantage of cheap prices to stock up on many raw materials. That has boosted both commodity prices and shipping rates, but it is too early to know whether a recovery in China will translate into a broader lift for global growth, analysts say.

"Things are better in China, and the Baltic Dry Index reflects that," said Bart Melek, senior commodity strategist with TD Securities. "We've seen industrial production recover, and they're going to need raw materials to feed that."

The shipping index remains a closely watched gauge of global commodities demand, in particular for the steel industry, which gets much of its main raw material, iron ore, from Brazil and Australia via sea freight. The measure's recent rally comes as commodities such as iron ore and copper have started to come off their recent lows. Iron ore for immediate delivery to China, for instance, was trading for just over $135 a dry metric ton Wednesday, according to London-based data provider the Steel Index. That is down 6.8% on the year but up 22% from an eight-month low in late May.

As China increases its dry-bulk supplies from places such as Brazil, traders say, freighters have been tied up in longer voyages, exacerbating price increases.

"A round trip from China to Australia takes about 30 days, but [from] Brazil, where trips are on the rise, it takes 90 days," keeping ships off the market, Mr. Vlachopoulos said.

Broad-based restocking after the weeklong Chinese New Year holiday in February also boosted activity in the dry-bulk market, brokers said.

"Chinese buyers are usually price sensitive, and with improving market sentiment, people just dare to hoard," said a Qingdao-based shipping-firm owner.

Recent dry weather in China also has pressured water supply at local plants that make iron-ore pellets, driving up demand for imported iron ore, said Mark Williams, research manager at global shipbroking firm Braemar Seascope. "You might call this [an] alignment of the planets.…Different influences have come together all at the same time," he said.

Brokers warn that the Baltic Dry Index rally isn't yet a sign of a broad-based recovery in the global shipping market, since the shipping industry is still feeling the strain of overcapacity after shippers built up large fleets prior to the financial crisis.

However, market players lately have held out hope that global economic activity is set to pick up for the remainder of the year as recent data from China, the world's largest consumer of many commodities, showed signs of rebounding. Economic figures out of Europe and the U.S. also have been encouraging.

China's industrial sector rebounded strongly in August, as industrial output climbed 10.4% year over year, up from 9.7% in July and the highest growth rate since March 2012, according to data released Tuesday. Market participants said Chinese iron-ore imports in August were about 69 million tons, up 10% on the year.

"We see a great appetite by the Chinese for iron ore," said Aris Vlachopoulos, a Singapore-based shipping consultant. "They are taking advantage of relatively low prices and restocking not only from traditional sources, like Australia and Brazil, but also from the U.S., Mexico, Chile and elsewhere."

—Yue Li in Shanghai and Tatyana Shumsky contributed to this article.

Publish date: 11/09/13

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