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Why Large Shippers Are Obsessed with Shipping Market

In our last article, we said that dry bulk carrier market will see increasing influence of large shippers. Particularly, large shippers are exercising a powerful influence on the shipping market mainly by chartering ships instead of owning them.

To be specific, large shippers prefer to charter rather than own ships, because they see less financial risk in chartering ships by taking advantage of such hedging techniques as FFA than in making large-scale investments to own ships.

Continued oversupply in the global dry bulk carrier market

Then, why is it that large shippers actively engage in and are increasingly obsessed with dry bulk carrier market? The reason is that while the demand from those countries that consume raw materials produced by large shippers is inching closer to its limit, production by the countries is getting bigger and bigger, thus aggravating oversupply.

Just as the continued oversupply in the global dry bulk carrier market has led to the long-term depression in the shipping market, iron ore and coal, which take up over 50% of the global demand for dry bulk carriers, continue to see their prices tumbling due to aggravating oversupply.

Iron ore price
Five years iron ore price history (source: afr.com/data)

As for iron ore, it sees a sluggish demand from China, the world’s biggest consumer, as the country’s economic growth is slowing down. Moreover, China’s policy that protects its companies (by requiring that maximum 20% of raw materials be made in China) limits additional import of iron ore from overseas. Last year, China imported 77.5% of its supply of iron ore from overseas, which means that only 2.5% more can be imported this year.

Coal import registered the first decrease in history, as China strengthened its environmental protection policy and thereby banned the import and consumption of low-rank coal. While the transported volume of coal is expected to increase as India is increasing the portion of thermoelectric generation, it is not going to offset the reduction in the Chinese import of coal by a long shot.

Large shippers maintain their profit by reducing costs

With demand for major commodities slowing down or dwindling, large shippers now find themselves in a dire situation in which they have to keep their business profitable by reducing costs only through optimizing the entire process, which includes the production, storage, processing, transport, sales, and distribution of commodities.

This should mean that like shipping companies, large shippers for dry bulk carriers have no other choice than to strive to remain competitive through cost reduction. Exactly for this reason, Brazil-based Vale has continuously worked to have the Chinese ports directly served by its 4000,000-DWT iron ore carriers.

Looking ahead, we expect that in dry bulk carrier market, large shippers will continue to engage in the shipping market by adopting whichever will be an advantageous method between owning or chartering ships, and this, in increasing degrees. MEIC(Maritime Exchange Information Center) data shows that as of February 2015, 126 (54%) of 234 successfully concluded contracts for Capesize ships involved the chartering by large shippers, which suggests the degree of their engagement in the market.

With large shippers increasing their engagement in the shipping market, what should shipping companies do? Shipping companies now find themselves in a situation in which they must do anything to reduce their costs. International shipping companies should consider pooling their dry bulk carriers. At the same time, they should explore various alternatives by managing their fuel costs through futures trade that exploits volatility in international oil prices or hedging risks by taking advantage of the FFA market, among others.

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 247