2010-07-27 10:38

Higher costs

Higher shipping costs may bolster returns for Mitsui OSK Lines Ltd, Nippon Yusen KK and China Cosco Holdings Co, the biggest dry-bulk ship operators. Shipping lines typically lease vessels on long-term contracts on fixed rates as well as single-cargo voyages.

"We expect Chinese iron imports to recover when the price of iron ore drops further," said Masafumi Yasuoka, a senior managing executive officer at Mitsui.

Even if rates rebound to the $30,375 anticipated in the Bloomberg survey, analysts are more bearish than they were five months ago, when a Bloomberg survey of 11 analysts predicted $39,000 in the fourth quarter. Costs rose as high as $59,324 by June before slumping. The anticipated levels are also a long way off the record $233,988 reached in June 2008.

Part of that less-optimistic outlook can be explained by China's efforts to slow growth, which eased to 10.3 percent in the second quarter from 11.9 percent in the first. The nation raised bank reserve ratios three times this year and introduced lending controls to contain property prices. Citigroup Inc cut its outlook for China's 2010 economic expansion last week by a percentage point to 9.5 percent.

Baoshan Iron & Steel Co, the biggest publicly traded Chinese steelmaker, said July 13 it would cut prices for a second month amid weakening demand. Mills have curbed output, with Chinese production falling to 53.8 million tons in June, 4.2 percent less than in May, according to the World Steel Association in Brussels.

There is also no sign yet of a drop in iron-ore stockpiles at Chinese ports. Inventory expanded for four consecutive weeks to almost 74 million tons by July 16, according to data from information provider Shanghai Steelhome. That came even as monthly iron-ore imports fell to 47.17 million tons in June, the lowest since January, customs data show.

The port inventory data isn't reflecting what is happening at mills, where there has been a "reasonable destocking", said Colin Hamilton, an analyst at Macquarie Group Ltd in London.

The plunge in iron-ore prices since April came amid concern that the global recovery will slow and also reflected a switch from annual to quarterly contracts for iron ore. Steelmakers built up inventory in the second quarter, anticipating higher prices in the third, Barclays Capital said in a report July 16. Imports are also being curbed by more supply of iron ore from domestic mines, which is typically of a lower grade and therefore less competitive as prices decline, the bank said.

Capesize rates are so low now that some owners are likely to anchor to wait for better prices, shrinking vessel supply, said Guy Campbell, head of dry bulk at London-based Clarkson. Daily operating expenses, excluding financing costs, are about $7,000, he said. There are 1,044 capesizes in service, according to Clarkson.

As much as 25 percent of the capesize fleet anchored in December 2008, after rates slumped 99 percent to $2,316 in six months, Fearnley Fonds ASA said at the time.

"Day rates are unsustainably low," said Scott Burk, a shipping analyst at Oppenheimer & Co in New York who was named by the Wall Street Journal as the top stock picker for industrial transportation in 2007. "We've already heard indications that owners are staying away from the charter market, rejecting cargoes."