Earthquakes and floods bite into global shipping profits

The series of natural disasters that rocked Australia and Japan this year have hit the global shipping freight trade hard. Combined with an overcapacity of ocean-going vessels worldwide, it is leading to some tough financial times for seafaring captains of industry.

Members of the Self-Defense Forces search for missing people in front of a fishing boat stranded during the March 11 earthquake and tsunami in Higashimatsushima, Japan. Kimimasa Mayama / Bloomberg NewShow more

The torrential rains and burst rivers that flooded much of the Australian state of Queensland at the beginning of the year wreaked havoc on the country's economy, wiping tens of billions of dollars from its GDP.

But what is less known about the natural disaster, estimated to have cost the country as much as A$30 billion (Dh117.58bn), is its effect on the global shipping industry.

Up to 30 million tonnes of iron ore worth about A$4.26bn was unable to be dug out, processed, carted and then shipped off to the world's factories in China and elsewhere after mines were flooded.

"The negative impact on exports caused by recent flooding is expected to have a significant impact on the national accounts numbers for March," said Wayne Swan, the Australian treasurer, after data showed yesterday that exports dropped by 8.7 per cent in the three months to March, representing the biggest quarterly fall in 37 years.

Weather conditions and the boom-bust nature of the shipping sector are crucial factors in global trade. More than 90 per cent of the world's goods are carried by ocean-going vessels.

When natural disasters strike countries that produce commodities, the resulting delays cause ripples across the world. Meanwhile, in windfall years the shipping industry gorges on profits, an estimated US$80bn (Dh293.84bn) in 2004.

Apart from the problems in Australia, the Japanese earthquake and tsunami disaster in March also hit the shipping industry.

The devastation was enormous.

The insurers Lloyd's of London has taken a $3.8bn hit as a result of earthquakes and floods in the first quarter of this year, and predicted the high number of major claims in the aftermath of the catastrophes would lift insurance prices this year.

Maritime experts said the impact on US trade was difficult to gauge. The main ports in Japan, the world's third-largest economy, were spared.

But car factories and electronics plants sustained major damage, and broader production disruptions persist amid ongoing power shortages.

This is likely to affect ocean and air cargo volumes for months.

In April, foreign crew members refused to sail near Japan's earthquake-crippled nuclear power station and into some ports, even outside the exclusion zone, forcing shippers to use Japanese vessels instead to transport goods.

"Crews do not want to go there. Even Chiba, crews still do not want to go," Kyuho Whang, the chief executive of South Korea's SK Shipping, said at the time, referring to the radiation leaks at the Fukushima nuclear complex on the north-east coast of Japan.

"So they rely more on the Japanese vessels than the foreign vessels."

Apart from natural disasters, the shipping industry has also had to overcome other problems. In the boom years before the global downturn, shippers reinvested profits and ordered new vessels.

Hardly surprising then that overcapacity has become an affliction as economic cycles have turned times of plenty into periods of mere survival.

"The exceptionally weak day rates in the dry bulk shipping market in the first quarter of 2011 were due to weather disruptions around the globe," says Doug Garber, an analyst with FBR Capital Markets.

Shipments of iron ore and coal declined by 50 million tonnes in the first quarter, or 11 per cent below average, due to bad weather in Australia and Brazil.

In addition there was a supply bottleneck in South Africa and export permit delays in Indonesia, Mr Garber pointed out.

As a result, the shipping industry's bellwether indicator, the Baltic Exchange's main sea freight index, has more than halved in the past six months and is close to levels last seen during the global downturn in 2008.

There are also expectations the onset of India's monsoon this month will also reduce iron ore exports as rivers rise, making it harder to transport goods.

There were worries in the shipping sector the economic recovery seen by other transportation sectors, such as airlines, has largely passed by maritime companies. But hopes brightened in the past two weeks with a recent upsurge in activity.

The Baltic Index, which is based on daily ship chartering rates, rose close to a two-month high last week to 1,467 points - up more than 10 per cent since the beginning of the rally. The growth has been largely attributed to growing demand for cargo vessels plying the Atlantic Ocean.

Nigel Prentis, a director with HSBC Shipping Services, said shippers' profits were being hard hit because they were unable to charge sufficiently high rates for vessels such as capesize cargo ships, which typically haul 150,000 tonnes of iron ore or steel each, and are so named because they are too large to fit through the Suez Canal and instead travel around the Cape of Good Hope.

"In percentage terms it is quite a big gain but it is still [average daily earnings] of under $10,000 for capesizes, which barely covers the operating costs. So it is nothing to get terribly excited about," said Mr Prentis.

Another looming worry is the effect of deliveries. Global shippers, including companies from the Middle East, participated in an historic order spree between 2006 and 2008, and many of these orders are now being delivered, adding additional excess capacity.

In 2007, the United Arab Shipping Company ordered nine ultra-large container ships, each capable of handling 13,000 20-foot containers, in a deal with Samsung Heavy Industries of South Korea worth Dh5.5bn. It is due to receive the first vessel this summer. The Abu Dhabi National Tanker Company also invested heavily prior to the downturn, and is expected to have received 15 new vessels from South Korean shipyards by the end of this year.

In its latest research note on the Middle East transport sector, Nomura Securities said it was "surprised" by the extent of vessel overcapacity for very large crude carriers, capable of handling 2 million barrels of oil.

"Shipping rates have not responded to the rise in oil production," it said. Although Nomura believes the market for these oil tankers will improve in the medium term, "we are now turning more cautious", the company concluded.

Owners of dry bulk carriers may have more to cheer about. A poll conducted by Reuters found the shipping industry expects sea freight demand to grow by up to 15 per cent in the second half compared with the first half, primarily due to the resumption of exports from Australia.

* with agencies