Saturday, February 25, 2006

Transportation/ Shipping/ Bulk carriers 2 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Shipping companies have had a bull run over the last three years, a classic cyclical industry if there ever was any. Being a cyclical industry, it promises huge rewards (as has materialised) but also huge risk if one should happen to buy in near the peak of the cycle. With cyclical industries, one has to be more vigilant in watching industry trends and anticipate potential turning points.

The bulk shipping industry had reached a mid-term peak in late 2004-early 2005 with the Baltic Dry Index, the definitive bulk-shipping index, peaking at >5500 and then declining by about 40-50% since. It is debatable whether it is merely a blip in a secular trend anchored by rising demand from emerging China and India, or the beginning of a sustained downturn exacerbated by the coming influx of new ships starting delivery in 2006. One may do well to be more familiar with the industry and monitor reports vigilantly; this is where my description of bulk carriers comes in, largely drawn from the IPO prospectus of STX Pan Ocean.

Main carrier types
There are four main segments in the shipping industry: bulk carriers, which transport such raw materials as coal and grain; tankers, which transport such cargo as crude oil, petroleum products and chemicals; container vessels, which transport freight shipped in containers; and gas tankers which transport mostly liquefied petroleum gas (or “LPG�) and liquefied natural gas (or “LNG�).

Definition of bulk cargo
What the bulk carriers transport is known as dry bulk cargo, which is also known in investing parlance as basic materials. They are used in basic industries (which typically form the front-end of the supply chain and supply intermediate raw material to downstream industries) and in construction. Bulk cargo can in turn be divided into major bulk commodities and minor bulk commodities. Major bulk commodities consist of iron ore, coal and grain. One may note that this is the category that has undergone explosive growth due to the rise of China. Minor bulk commodities cover a wide variety of commodities, such as forest products, iron and steel products, fertilizers, agricultural products, non-ferrous ores, minerals and petcoke, cement, other construction materials and salt. Many of these major and minor bulk commodities can be traded via commodity futures, as traders of the more eclectic nature might be aware.

Categorisation of bulk carriers
Bulk carriers are generally divided into four categories by the industry, in terms of carrying capacity. In terms of descending order of capacity they are as follows:

Capesize- > 80,000 DWT (dead-weight tons)
Panamax - 60,000 - 80,000 DWT
Handymax- 40,000 - 60,000 DWT
Handysize- 10,000 - 40,000 DWT

Capesize- They are known as such because they are too large to transit the Suez Canal when fully laden. They typically move iron ore and coal, and undertake long voyages such as from South America to Asia (across the Atlantic), or from South Africa to Europe. From my understanding, they would ply sea routes which do not utilise the Suez Canal.

Panamax- These can pass through the Panama Canal fully laden. Panamax bulk carriers engage in long- and medium-haul trade in several dry bulk commodities. The underlying demand for Panamax vessels is driven by three industries: steel production, thermal power generation and grain. The majority of iron ore, coal and grain shipments supply the two major importing regions of East Asia and Europe. Panamax iron ore and coal shipments are sourced primarily from Australia, South Africa and the Americas, plus Indonesia and China, while the main grain loading areas are the U.S. gulf and west coast regions, South America and Australia.

Handymax/Handysize- Because of their size and versatility, Handymax bulk carriers are able to service a large number of ports that are inaccessible to larger ships. As a result, Handymax bulk carriers ship a wide range of cargo, including major bulks such as coal, iron ore and grain, as well as the numerous commodities that fall into the “minor bulk� category, particularly steel and scrap, sugar and fertilizer. Traditionally Handymax trade has been dominated by grain exports from the United States and South America, with delivery in Asia and Europe, and steel trade between Europe and Asia, in addition to the carriage of coal and iron ore on both long haul and coastal routes. However, China’s economic expansion has added significant new demand, with shipments of iron ore from India and finished steel from the Black Sea and Japan now accounting for a considerable level of trade.

Handysize- Similar in operational usage to Handymax as described above. They are employed primarily in short-haul trades.

One may note that while the charter rates for these four types of carriers typically follow similar trends, my observation is that the Capesize carriers would usually experience the greatest price fluctuations while the smaller vessels (such as Handysize) would experience less severe volatility. Because they are so expensive to construct, shipowners would tend not to invest in them until a massive deficit in supply is built up, which drives charter rates for existing ones to the moon. And when the global economy declines, it is the long routes which would be affected most as they tend to be the most expensive to operate.

(1) STX Pan Ocean IPO Prospectus
(2) Cape Times article Jan 2005: They may have few ports of call, but Capesize carriers rule the economic waves




Blogger zero2billion said...

doing some research of shipping and come through your blog, very detail explanation. Keep up the good job and hope can see more posting from you...

2/19/2007 04:19:00 PM  
Anonymous Air Compressor said...

I was really looking for some good information for shipping companies and I found this blog very useful for me. Keep such things posting in this blog fore more info..

9/06/2010 08:08:00 PM  

Post a Comment

<< Home