Ships reject unprofitable cargo to halt slump in rates

The worst start to a year for freight rates is leading one of the creators of shipping derivatives to bet on a recovery as owners of vessels carrying coal, iron ore and grains turn away cargoes.

The Baltic Dry Index averaged 769 since 1 January, the lowest since at least 1985, according to the Baltic Exchange in London. Rates for all vessels in the gauge are unprofitable, data compiled by Pareto Securities A/S in Oslo show. Investors should bet on a rebound by buying freight swaps, said Philippe Van Den Abeele, the managing director of Castalia Fund Management (UK) Ltd. and one of the creators of the derivatives market in shipping two decades ago.

“Owners are saying no to unprofitable cargoes,” said Peter Sand, a Bagsvaerd, Denmarkbased analyst at the Baltic and International Maritime Council, the trade group whose members control 65% of the global merchant fleet. “It’s impossible to run a profitable business at these levels. There is some kind of limit where even owners desperate to relocate or reposition their ships will not go so low.”

Rates plunged 93% since peaking in 2008 after owners ordered too many vessels just as the global economy entered its worst recession since World War II. The fleet will expand faster than demand for a sixth year in 2013, according to Clarkson Plc, the world’s largest shipbroker. All 12 members of the Bloomberg Dry Ships Index most recently reported annual losses or declining profit. That will narrow to six in 2013, analyst estimates compiled by Bloomberg show.