Cantor Fitzgerald Comments: Baltic Index Hits Fresh Low As China Slowdown Bites

July 13, 2010, Manila Bulletin Online

The Baltic Exchange's main sea freight index , which tracks rates to ship dry commodities, fell to its lowest level in over 14 months again on Monday as weak Chinese demand put the brakes on cargo activity.

The index, which gauges the cost of shipping commodities including iron ore, cement, grain, coal and fertilizr, fell 3.26 percent, or 62 points, to 1,840 points and was at its lowest since May 1 last year.

A combination of slower iron ore activity, weaker coal imports into China, easing port congestion and the ending of South America's grains export season have weighed on freight rates in recent weeks.

''There is very little iron ore activity and there is an inventory build up in China,'' said Tor Svelland, head of commodities at Pareto Securities.

''(Rates) could go down further but we are also getting down to levels where normally we would see some support.''

The Baltic index has had its worst run since 2008 and is over 50 percent down since it first started dropping on May 27.

The Baltic's main index has been erratic this year, similar to 2009, because of swings in Chinese demand for iron ore, the primary ingredient of steel.

''Concerns about a slowdown in the Chinese property market, over capacity and reduced profitability in the steel industry, a repeal of the steel export tax rebate, and a deflationary commodity environment have impacted iron ore demand into China,'' Cantor Fitzgerald said.

There has been growing uncertainty over China's ability to keep consuming commodities at the levels seen since the start of 2009, when a massive stockpiling and stimulus program boosted imports.

The Baltic's capesize index fell 7.28 percent on Monday with average capesize earnings falling to $15,997 a day and at its lowest since January 2009.

''The current weakness in the freight market, with capesize rates at ytd (year-to-date) lows of $17,000, reflects a very challenging environment for far eastern steel mills and iron ore imports,'' Dahlman Rose & Co said in a note.

The Baltic's panamax index fell 0.15 percent while the supramax index fell 1.54 percent.

More broadly, industry concerns over the pace of global economic recovery could hit shipping, given that about 90 percent of the world's traded goods by volume are transported by sea.

Analysts said freight rates also were expected to be dampened this year due to the pace of new ships set to enter the market in 2010 and 2011, despite indications of some vessel cancellations and delays.

''We continue to expect no let up in the fast-paced delivery schedule this year, forecasting the cape fleet to grow by 10 percent over the next six months and panamaxes by 5 percent,'' consultants MSI said in a report.