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Excess tonnage 'needs cutting by 30%' for improvement in dry bulk freight market: Drewry Maritime

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Excess tonnage 'needs cutting by 30%' for improvement in dry bulk freight market: Drewry Maritime

Bali — A reduction of an estimated 30% of excess tonnage supply is needed before the dry freight market can be turned around, a shipping expert with a maritime consultancy said at the Coaltrans Asia conference in Bali Tuesday.

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As the dry freight market continues to languish, the estimated demand growth for dry bulk would be around 3%/year over the next five years, while supply of vessels could grow by about 2% over the same period, Jayendu Krishna, a director at Drewry Maritime Advisors, said.

He said real GDP growth, population growth, steel intensity and energy intensity -- key factors to drive demand growth -- were all weak at the moment and hence returns to ship owners are expected to exceed operating expenses only by 2017-18.

"A high freight environment is not very close," Krishna said.

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According to the World Steel Association, the steel intensity curve shows how the state of economic development affects the level of steel consumed per unit of GDP. Energy intensity is calculated as units of energy per unit of GDP. Low energy intensity indicates a lower price or cost of converting energy into GDP.

New demand for the dry bulk market was becoming hard to spot. Falling steel intensity was leading to moderation in steel production and hence low growth in iron ore and coking coal trade, while the diminishing energy intensity was affecting the steam coal trade, he said.

The moderate growth in population and falling GDP growth is leading to reduced growth in overall dry bulk shipping demand, Krishna said.

The excess shipbuilding capacity that is available was also a cause of concern. "The moment charter rates go up, owners would want to order if [ship building] capacity is available," he added.

While freight rates have been very low recently, reducing the overall logistics costs, Krishna warned that it is an environment that is laden with risks for the charterers.

"As a [charterer], you would not like to see shipping companies go," bankrupt," he said.

"Freight rates have not been rational. It does not follow any fundamentals and has been incredibly volatile. It is difficult to predict," Fabio Gabrieli, Mercuria Energy Trading's director for Dry Bulk and Energy, told the conference Tuesday.

--Shriram Sivaramakrishnan,
--Edited by Maurice Geller,