Seaborne trade of dry bulk commodities is estimated to exceed three billion metric tons of cargo this year. No wonder many of the world’s biggest terminals are unable to handle the overwhelming volumes of raw materials such as coal and iron ore.
In today’s market, about 12 per cent of existing vessels are stuck in port because of congestion. The bottlenecks are effectively limiting the available tonnage offered to charterers scrambling to fix the few, if any, available ships suitable for carriage. With little terminal investments coming to fruition before 2010, indications are that ports may suffer more until capacity is built to match the projected cargo handling of the vital minerals.
The Crowne Plaza Hotel in Newcastle, Australia is a convenient starting place for a reality check into the port congestion problems facing the dry bulk market. On the hillside from the hotel is the King Edward Park overlooking tenfolds of Capesize, Panamax and Supramax bulk carriers waiting to load steam coal and metallurgical coal at the greatest coal export terminal worldwide – the Port of Newcastle.
Newcastle, Australia, 24 August 2007: Currently, there are some 35 dry bulk vessels waiting off the port to load 3.4 million tons of coal. The average waiting time is just short of 12 days.
The problems at Newcastle got out of control in July 2007 after vessel movements were suspended because of severe weather in the Tasman Sea. Work was also carried out to secure the stricken 76,000 dwt Panamax bulk carrier Pasha Bulker. At the most, 79 vessels were lying off the Port of Newcastle and five were waiting in the port.
The port authorities have attempted to deal with the excessive waiting by using a designated quota system. In May 2007, the Australian Competition and Consumer Commission gave approval to Port Waratah Coal Services, owning and operating the two export coal terminals in Newcastle, to reinstate the so-called counter balancing system (CBS). The authorities aimed to apply the CBS as an allocation system constraining coal producers to produce according to coal chain capacity.
PWCS applied a further one million ton cut in CBS allocation across September and October 2007, targeting a reduction in the vessel queue to below 30 vessels. Still in work, the CBS has been extended through the end of 2008.
Despite good intentions, these measures have apparently not worked as intended. Commercial interests and capacity constraints are at odds. With steam coal free-on-board sales prices quoted at USD 185 per ton on 23 June 2008 from Newcastle, Hunter Valley producers have every incentive to sell as much coal as possible. Although buyers are bidding lower prices, forward prices have consistently been higher than spot prices, creating a contango price structure that induces buyers to ramp up imports in anticipation of prices going up in upcoming months.
Eager to capitalise on high coal prices, Hunter Valley producers have sold more coal than the infrastructure allows for in moving coal from mines onto ships. In December 2007, Hunter Valley coal producers reportedly nominated cargo of 106.7 million tons on an annualised basis, compared with PWCS’ nameplate capacity of 102 million tons, divided between the Kooragang Coal Terminal of 77 million tons and the Carrington Coal Terminal of 25 million tons. However, because of limitations in the train and track capacity, actual shipments flowing out of Newcastle were only 84.8 million tons in the whole of 2007, a 6.2 per cent increase on 2006.
The underlying problem is that coal producers will not be swayed to reduce sales in a market craving for coal. The exceedingly high coal prices are encouraging coal producers to override concerns about demurrage costs. Assuming that demurrage is stipulated at USD 50,000 per day and the waiting time is 12 days, then demurrage will be USD 8.6 per ton for an incoming Panamax bulk carrier loading 70,000 tons of coal.
Plans are underway for capacity expansions in Newcastle, including a new project by the Newcastle Coal Infrastructure Group to ensure adequate long-term capacity in the Hunter Valley export coal supply chain. New coal projects of NCIG members are planned to contribute an additional 30 million tons within the next five to ten years. Other expansion projects are planned in hard-hit Australian coal export terminals such as Gladstone, Hay Point and Abbot Point.
Yet, before these investments materialise in 2010 onwards, there is little to suggest that port congestion will ease off significantly. In 2009, some one billion tons of steam coal and metallurgical coal will likely be shipped worldwide. Japan will take the lion’s share in Asia with 130 million tons of steam coal and 43 million tons of met coal. China will come in heavily, with estimated imports of 59 million tons of steam coal and seven million tons of met coal. Europe will also be a big taker, with likely imports of 165 million tons of steam coal and 48 million tons of met coal. These requirements, and others, will put a big strain on producers not only in Australia but also Indonesia, South Africa, North America and Russia.
Coal is not the only commodity taking everyone by surprise. Seaborne trade of iron ore has increased exponentially on the back of insatiable demands from Chinese steel producers. Growing by 15 per cent annually, Chinese steel output is expected to total 640 million tons in 2009, necessitating iron ore imports of 520 million tons. In contrast, ten years earlier the volumes totalled only one tenth at 55 million tons.
Port congestion in China is resurfacing after having been dealt with successfully since 2005. In major iron ore import terminals such as Qingdao, Rizhao and Beilun, vessels are waiting up to a week for berth to discharge their cargo. However, because of significant expansion programs, the problems are moderate compared to five years ago.
In 2003–2004, many of the Chinese discharge ports suffered from port congestion because of inadequate capacity, both in port and inland. The situation deteriorated in the fourth quarter of 2004, when queuing at the Chinese discharge ports and other international loading ports caused 12 per cent of the entire dry bulk shipping fleet to be affected by port congestion. However, in the first and second quarter of 2005, port congestion in China eased off as a result of port and inland logistical capacity expansion as well as seasonal and commodity stock factors.
In India, South Africa and Brazil, port congestion is also a seasonal and/or systemic problem. Earlier this year in Brazil, the Itaguaí maritime terminal was re-opened after a two-month closure for repairs. A rail bottleneck at the Carajas operation has also been resolved. By increasing the number of railcars and reducing the number of trains, productivity could be raised increasing shipping volumes in the second half of 2008. However, port congestion continues to be a problem with Ponta da Madeira suffering from the biggest delays of up to two weeks.
Canal congestion is chiefly related to the Panama Canal, which has repeatedly suffered queuing problems in recent years.
In total, about 12 per cent of the entire dry bulk shipping fleet is affected by port congestion, thus unavailable to charterers. In an already very tight market, this pushes up fleet capacity utilisation and contributes to increasing freight rates.
Most likely, port congestion will remain a chronic problem in the dry bulk market as long as demand for major and minor bulks continues to overwhelm miners and port authorities. Thus, in high season, the port congestion problems could continue to affect as much as 10–12 per cent of the fleet, and in low season, port congestion could affect about six per cent of the fleet.
Lorentzen & Stemoco AS
nicholai.hansteen@lorstem.no
Date: 2008-09-08
