Rising tide Commodity volumes good for shipping and producers
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.
Filling the ships again