The Capesize Trade in 2012 and the factors that affect them
In this paper, it is a brief specification of the Capesize trade and separates the Capesize trade in 2012. The different factors influence this trade. In addition, the term of 2012 has been a trusted earning period for the Capesize ship owners? This essay aims to understand the factors affecting the Capesize trade as simple as possible. It also helps to explain the reasons for the period that we live in is not the best for their ship owners.
The general factors
The Capesize trade has many factors. First, there are the bunker costs. A Capesize vessel needs approximately 50 tons per day. The voyage cost is the 66% of the running cost that includes the bunker cost, which is the fuel oil (66%) and diesel oil (10%). In total, it is the 47% of all the cost (Stopford 2009). That means the bunker cost is terribly valuable and play a key role in profits. The current price of bunker fuel cost in Fujairah is $597 per tonne. Cheaper compared to the previous month but remaining extremely expensive (Brown 2012). This unacceptable variation in oil prices has resulted in the reduction of the speed. By slowing a vessel down from 15 knots to 11 knots; fuel consumption may well be reduced by 50 percent. On the run from Brazil to China, for example, this means a round-trip increase from 65 days to 86 days of Capesizes for reasons of economy (McCarthy 2012). This reduction is not for profit. It is to cover the needs of the ship and reduce the lost. According to the impressive record changes of bunker cost, many of the Capesize ship owners have tried to sell it out. Another important factor included in operation cost is the age of the ship. A twenty years old ship does almost double the costs for repair and maintenance and consequently has greater fuel consumption and greater premiums, compared to modern ships.(Stopford 2009)
A second key factor is the demand of products and in this case the demand for iron ore and thermal coal mainly. The key factors that affect supply and demand should be considered. Demand depends primarily on the world economy. On the other side, we have the supply, which in this case is the world fleet of Capesize dry bulk vessels (Overcapacity). This implies new construction, shipbuilding deliveries at a specified time and scrapping of the vessels in different periods of the year. Finally, pivotal role-plays the freight market, which links to supply and demand. As a result, when demand is low only a part of this fleet trade. With the majority remaining at rest or travel in ballast (Stopford 2009). In other words, overcapacity on the market means low freights and restrictions on ships that will carry the cargo. “Undoubtedly, the most important single influence on ship demand is the world economy” (Stopford 2009).
Thirdly and the hugely powerful factor is the economy of China. All began in the mid-1990s. The Chinese economy opened to free trade (Stopford 2009) and now China influences the global market and much more the trade of the Capesizes. “China, imports more iron ore than the rest of the world combined’’. “Capesizes, carrying more ore than any other vessel class” (BLOOMBERG 2012). In the event that China does not import or export iron ore is a serious problem to ship owners managing Capesizes. A reasonable example characterizes the summer of 2012 (McCarthy 2012). In the opinion of the author, all are hovering around China. Somehow, the prices of iron ore adjusted so that China can buy. This, however, is relevant and accurate.
Other two main factors in the author’s opinion are the alternative energy systems and the harbour facilities. Alternative forms of energy affect the transport of thermal coal for power plants, whenever the transport of coal by the Capesizes will decrease. The continuous rainfall helps no large demand for coal in China (Leander 2012). A new generation of the Capesize, large capacity Capesizes that are larger than 200,000 DWT would have trouble getting in most ports. Also, remarkably few ports that can handle those vessels. The coal trade can handle only eight ports. Iron ore is just sixteen. The biggest issue remains wide (van den Berg 2012).
Finally, many factors can influence the Capesize market. These influences are sometimes good and sometimes not. In the opinion of the author, some even unknown factors can alter the global markets and the products demand. Briefly, the first unpredictable factor is natural disasters and wars and even terrorist attacks but to a lesser distinction. All of the above have a common result. What is; Destruction. March of 2011 was the period that hit the terrible earthquake and tsunami in Japan. Before this disaster, the world fleet of the Capesize dramatically was been raised every day, the freights were low. A few months later after the disasters, Japan needed iron ore and thermal coal for being able to be degraded. That led to high fares and the demand of the Capesize was increased (McCarthy 2011). Well-known terrorist attacks throughout the world affected the fall of the Twin Towers in Manhattan and created utter confusion in world markets (Chasty 2002).
Has 2012 been a good year for Capesize vessel owners?
The year 2012 has not been good for Capesize vessel owners due to a number of factors. The major factor of the dramatic decline in shipping indices has been due to the complexity in arranging trade finance during the credit crunch. This has led to many big players involved in the shipping of dry commodities feel uneasy to trade with some parties fearful of their financial footing. The ravaged international demand for freight ships is because of the chronic international financial crisis affecting credit availability, an unprecedented synchronised economic fall across major national economies in the world caused by huge demand destruction, and the resultant falls down in commodity prices. At the same time, container rates in the Asia-Europe routes have dropped by bigger percentage this year and a price war between companies seems to be driving rates lower and lower, destroying the profitability of shipping and placing huge stresses on companies struggling to meet their commitments.
The dry bulk market has been weaker this year than in 2011, whereas the smaller gas carrier segment has been enjoying slightly better spot, market rates in 2012. Of shore, markets have been having upward demand trend with healthy rates. Last year the resilience of freight rates was supported by strong growth in seaborne dry bulk trade by about 10%, while supply increased by about 14%. This helped most operators’ earnings remain above breakeven levels despite the natural disaster that occurred in Japan and long rain in Australia. This year supply growth has been similar but demand growth has been slightly lower, though still strong in historic terms. However, this means the supply-demand gap widening putting further pressure on freight rates.
Port congestion is another variable that is not controlled by the ship owner. Port congestions primarily a problem for dry commodities, such as ore and coal. The dry cargo fleet currently spends about 6 percent of its time idle in ports because of the lack of infrastructure for getting the cargo onboard in a timely fashion. This equates to roughly 20 days of lost efficiency. Assuming 9,000 bulk carriers at a cost of US$10,000 per day, the annual global cost of this inefficiency is about US$18 billion. With possible future increases in demand, congestion is likely to increase. In the current market situation, freight rates are high but not sufficient for ship owners to break even because of the high cost of fuel. Thus the demand for ships has dropped, resulting in substantially lower ship values and in a lower cost of building new ships.
There is also a possibility that the traditional backhaul trades are increasingly irrelevant with the price pattern in the wide spot shipment markets. The trend over the past decade has been declining volumes of coal from Australia and South Africa into the European markets as the growth of energy consumption in China and India has outpaced that in the west. Consequently, very few Capesize bulk carriers sailing from the pacific to the Atlantic Ocean will actually be able to obtain a paying cargo and the vast majority will ballast back. A more relevant trade is, therefore, the China-Brazil return voyage. Although there are some doubts about China’s iron ore import growth rate because of the government’s economic efforts to control inflation, which could dampen activity, and the high iron ore price has prompted China to increase use of its domestic iron ore resources to reduce import costs. What happens to the global iron ore price will, therefore, have a key bearing on how much China imports in the coming months and therefore in turn on the Capesize bulk carrier freight market.
The limited prospect of an imminent meaningful recovery in Capesize rates means that values are also likely to remain subdued with little reason for owners to invest in second-hand tonnage until they see more positive signs that have reached a low point and earnings will pick up. Even if they do see such opportunities, many are heavily constrained in their ability to raise finance for new investment, with shipping banks still operating conservatively and other investors more cautious about dry bulk shipping.
The latest syndicated lending statistics shows that some shipping banks are becoming more willing to support shipping finance deals, although the figures were padded out by big offshore and cruise industry deals. However, looking from a variety of perspectives including investors, ship-owners, and operators, the shipping finance challenge looks frightening. Depressed vessel earnings and values together with narrow options for raising new funds for investment or re-financing are posing key challenges for lenders. In addition, this context of increasingly worrying global monetary indicators, with recoveries stalling in many key consuming countries including the China and India trying to bear down on inflation and sovereign debt struggle rising in some Eurozone countries in particular
Continued high oil prices and the requirement for cleaner fuel are expected to place an upward pressure on transportation cost. More fuel-efficient tonnage will ease this pressure somewhat over time. However, because of capital constraints and low income, the renewal of fleet in any meaningful way will take time. The current low rates, coupled with high scrap prices, will increase demolition to new peaks-possibly as high as 70 million DWT a year.
Further reduction in speed will reduce the availability of tonnage and put upward pressure on rates. A bit further, out of time, tonnage available will also reduce somewhat because of the ship going to shipyards to be upgraded with emission and ballast water treatment system. The actual cost of shipping assets is expected to be lower than it was in the last decade. Operating shipping cost inflation is not expected to be high. Thus, the cost of the ship itself is not expected to put upward pressure on shipping cost unless there is a shortage of tonnage.
For the dry cargo business, better infrastructure around ports will reduce the cost of transportation because ships will wait less time for cargo, thus making the fleet more efficient. These factors high fuel cost, congestion in ports, lack of financing, and ability to innovate will determine the degree of which shipping cost will serve as a significant trade barrier in the future.
Work cited: The Capesize Trade in 2012 and the factors that affect them
- Martin Stopford, (1997). Maritime Economics: Second Edition New York City: ponting green publishing services
- Brooks, M.R. (2003). Sea change in linear shipping: managerial and decision-making in global industry. Oxford: Pergamon press.
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- Dexit, A. and R.S. Pindyck, (1994). Investment under uncertainty. New Jercy: priceton university press.
- Tannetoes, Z.S. (1966). The theory of oil tank ship rates. Cambridge: MIT press
- Beenstock, M. and A. Vergottis, (1989a). An economic model of the world market for dry cargo freight and shipping. Applied economics, 21(3), 339-356.