Ris­ing tide Com­mod­ity vol­umes good for ship­ping and pro­duc­ers

Finweek English Edition - - Insight -

SEARCH­ING FOR SIGNS of an up­turn – those ter­ri­bly clichéd “green shoots” – is be­com­ing a na­tional ob­ses­sion. It’s the hard num­bers that count, so Grindrod’s re­ported uptick in dry bulk cargo vol­umes might just be an en­cour­ag­ing sign. “De­mand for com­modi­ties is up,” says Grindrod CEO Alan Olivier. But it must be put into per­spec­tive. “What hap­pened with the fi­nan­cial cri­sis at the end of last year is that lots of de­mand for com­modi­ties was with­held from the mar­ket. For us that meant vol­umes dropped sharply into this year: we still had fixed con­tracts in place for the last three months of 2008, but the de­cline was sig­nif­i­cant in the first three months.”

But since then Olivier says there’s been a pos­i­tive in­crease in de­mand. “For ex­am­ple, iron ore reached a low level, not sig­nif­i­cantly so be­cause de­mand from China was higher than ever. But now more of the tra­di­tional buy­ers are com­ing back into the mar­ket so we’re see­ing an in­crease in vol­umes.”

Olivier says for Grindrod op­er­at­ing trade vol­umes out of South Africa over the first four months of the year were poor. “Since then, though, they’ve climbed back to pre­vi­ous lev­els. But that’s vol­umes – freight rates for those vol­umes are down.”

Grindrod has some pro­tec­tion against this through its pol­icy of ne­go­ti­at­ing fixed con­tract prices. How­ever, Olivier says those are con­stantly be­ing re­newed and have to be set at lower prices.

“Over­all, though, in our view things are far more pos­i­tive now than they were in the first few months of the year. There’s more de­mand out there. The big ques­tion is whether that’s in­creas­ing de­mand or users re­stock­ing af­ter hav­ing used up in­ven­to­ries. I be­lieve it’s a com­bi­na­tion of both.”

Apart from iron ore, Olivier has also no­ticed in­creased de­mand for chrome and fer­rochrome. “There’s also lots of de­mand for coal. But the prob­lem for SA’s coal pro­duc­ers is the strong rand – and of­ten get­ting coal to the ports.”

The strong­est com­plaint is about the rail link to the Richards Bay Coal Ter­mi­nal that can’t han­dle cur­rent or in­creas­ing ca­pac­ity. Grindrod owns a coal ter­mi­nal in Ma­puto, Mozam­bique, but Olivier says the rail link there is also not suf­fi­cient to move the re­quired vol­umes of coal.

Lower freight prices and vol­umes have hit the global ship­ping in­dus­try. With de­mand for com­modi­ties in­creas­ing it’s the old story of ship­ping lines not hav­ing suf­fi­cient ca­pac­ity, mainly cargo ves­sels, to deal with in­creas­ing de­mand.

New ships take at least two years to build and many ear­lier or­ders for new builds were can­celled when the global fi­nan­cial cri­sis hit home last year. For the past decade Grindrod has bought and built new ships at the bot­tom of the, of­ten volatile, world ship­ping cy­cle. Op­por­tu­ni­ties could be ap­pear­ing again. “We’ve al­ways said – as part of our strate­gic pol­icy – the time for us to make ac­qui­si­tions and buy ships is in a weak mar­ket. There are some dis­tressed ship own­ers out there. I think those lev­els of dis­tress could in­crease. The tim­ing may not be right now but op­por­tu­ni­ties will come.”

Grindrod pri­mar­ily ships bulk cargo. For­mer South African owned Saf­ma­rine, as well as Mediter­ranean Ship­ping Com­pany, con­cen­trate on con­tainer ship­ments. Grindrod could also ben­e­fit from what looks like a higher oil price that might per­sist as de­mand in­creases from oil users that have run down stocks. It op­er­ates a fleet of around 70 ves­sels, 37 owned and the rest con­tracted.

De­spite the sharp down­turn in global ship­ping, Grindrod’s share price has been buoy­ant, com­fort­ably beat­ing the mar­ket on the JSE with a 37% in­crease over the past year. Higher vol­umes, even at lower prices, should boost its share price fur­ther.

ALAN OLIVIER

Fill­ing the ships again

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