Key freight index to rise 35% in H2 on China: Poll

• China demand for coal, iron ore expected to drive market
• Average capesize earnings to rise to $12,400 in H2
• Panamax earnings seen  increasing to $11,000

SINGAPORE (Reuters): The Baltic Exchange’s Dry Index, an indicator of global economic activity, will rebound by 35 percent in the second half of 2012 versus the last six months on a recovery in Chinese iron ore and coal demand, a Reuters poll showed last week.

The euro debt crisis, slowing economic growth in China, and an oversupplied global fleet have battered the shipping industry in the first half of this year, driving down the benchmark index by around 45 percent from H2 2011.

A Reuters poll of 10 analysts and traders indicated the index is expected to recover in the last six months of this year, averaging 1,268 points.

“The key drivers will be renewed demand for thermal coal in China, continued replacement of domestic iron ore with seaborne iron ore in China, and a broader global economic recovery,” said Janet Lewis, shipping analyst at Macquarie Securities, which is the most bullish respondent in the poll.“The risks are that too much (shipping) capacity will weigh on rates no matter how much demand is out there,” she said.

The global dry bulk fleet, which mainly transports iron ore, coal and grains, was expected to grow by about 14 percent this year to 734 million deadweight tonnes, analysts said. That far exceeds the 4 percent growth in world trade expected by the International Monetary Fund. A four-year long downturn in the freight market has forced many shipping companies, such as Danish bulk firm Torm A/S , Indonesia’s PT Berlian Laju Tanker and Japan’s Sanko Steamship, to restructure their debt in order to survive.

“The biggest positive driver would be widespread bankruptcies of dry bulk shipping companies by the third quarter, leading to greater scrutiny of counterparty credit risk and, as a result, a smaller supply of credit-worthy tonnage providers,” said Rigan Wong, a transportation analyst with Citi Investment Research. On the demand side, the dry bulk freight market is largely tied to China’s appetite for iron ore and coal, two commodities that make up about two-thirds of seaborne volume carried on the industry’s largest vessels.  Waning demand in the world’s second-largest economy and falling commodities prices forced Chinese buyers earlier this year to defer or default on several coal and iron ore shipments from the United States, Colombia, South Africa, Brazil and Australia.

 To prop up growth, China has boosted private investment, fast-tracked infrastructure projects, cut back bank reserve requirements, and cut interest rates for the first time since the 2008/09 financial crisis.

Analysts expect further measures from Beijing, which ship owners hope will translate into greater demand for iron ore and coal shipments. Time chartered averages for capesize vessels were expected at $12,400 per day in H2, up nearly 90 percent from the previous six months.

Panamax ships were seen averaging $11,000 per day, a 25 percent rise from the first half of this year.