Rebuilding won't up freight rates

Japan's reconstruction efforts will do little to boost global freight rates that are near two-year lows as fleet expansion overshadows any demand surge from the world's third-largest economy.

The benchmark index for seaborne trade, an indicator of world economic activity, has struggled to recover after touching their lowest since 2008 in February, with only a small, brief spike likely in the coming months as Japan rebuilds its crippled economy after a devastating earthquake and tsunami.
That should keep freight costs relatively cheap for major importers such as China and India which are struggling to contain spiralling inflation sparked by record high commodity prices.
'There is as much as a 10 per cent difference between demand and supply growth this year,' said Rigan Wong, a Hong Kong-based shipping analyst at Citigroup. 'Japan alone will not be able to push up demand in line with supply.'
The Baltic Exchange's Dry Index (BDI) hit a two-year low of 1,043 last month.
Recovery and reconstruction efforts from the quake is likely to take at least five years, with initial cost estimates at US$180 billion, or 3 per cent of Japan's annual economic output.
Demand for vessels to move coal and iron ore to restore consumption will easily be met by the huge dry bulk fleet, with hundreds of capesizes and panamaxes, the market's largest vessels, already fighting for very limited work.
'I still think we could see fresh two-year lows,' said Janet Lewis, a shipping analyst with Macquarie Securities.
'Through the end of the second quarter, we will see the BDI firming up but probably not a whole lot higher than where we are now. I don't expect we will get above 2,000 anytime soon, maybe we get up to 1,700.'
The supply glut was best reflected by the severe downturn in capesize daily earnings, which briefly dipped below US$5,000 in February after surging to nearly US$60,000 eight months before. Earnings traded at $9,369 last Friday.
Dry bulk ship owners ramped up orders of vessels before the economic downturn in 2008. It normally takes three years for a ship to be delivered and most of those vessels were now coming online, exacerbating an already oversupplied market.
Global freight demand has largely been driven by the huge economic growth in China, India and other emerging economies that are now battling to tame the impact of higher commodity prices.
One bright spot for Japan's crippled infrastructure is that many of its ports were unscathed by the earthquake, providing ample capacity to import coal, and other dry bulk needs.
Only one iron ore and three coal-handling ports were damaged, which together represent about 20 million tonnes of capacity for each commodity. Japan had a surplus import capacity of 68 million tonnes for iron ore and 147 million tonnes for coal in 2010, according to ICAP.
South Korea, Russia, Indonesia and other major commodity exporters have pledged to supply the country with extra cargoes of oil, coal and liquefied natural gas (LNG).
Yet, more than ports, Japan's ability to absorb supplies because of damaged storage facilities, roads and power cables may slow down shipments into the country.
Port capacity was not expected to be tested as coal imports were likely to be limited to 5-10 million tonnes this year as generators based on the fuel were already working close to capacity.