Grindrod weathering the global storm

Lindsay Roots, an analyst at BoE Stockbrokers, says low spot shipping rates have not badly affected some shipping groups, such as Grindrod, as most of its ships are on fixed contracts which are not linked to the Baltic dry index.

Last year, this dry-cargo index, which tracks daily shipping rates or the price of moving raw materials such as coal, slumped more than 90% on the back of the global credit crunch and dropping freight volumes.

A “Capesize” ship earned $300,000 a day for its operator 18 months ago. By December last year, however, this had plummeted to $3000 and now stands at about $10,000.

Roots says certain types of ships such as Capesize ones are in oversupply in an industry that is as sensitive as the automotive sector to economic mood swings.

He says the drop in spot shipping rates is largely attributed to the global credit crunch, which makes it difficult for shipping companies to obtain credit.

In reaction to the cyclical downturn in the shipping industry due to the global economic downturn, Grindrod, which has a total of 38 ships that it either owns or has on long-term charter, has reduced its exposure to spot shipping rates.

CEO Alan Olivier says the group's dry-cargo ships, which are prone to the spot shipping market, will be earning lower rates, forcing the company to retreat from the spot market.

Olivier says the shipping and logistics giant has increased contractual cover in its “handysize” dry-bulk fleet, with the group now having a contractual base of more than 60%, insulating it from the volatile spot rates.

Rob Forsyth, head of industrials at Investec Asset Management, confirms this view, saying that Grindrod has fixed contracts covering 62% of its shipping fleet this year and 41% for next year.

Forsyth says the drop in spot shipping rates is serious. If the decline persists for more than a year, most of the dry-bulk shipping firms would suffer losses.

“Since the year-end, shipping rates have roughly doubled, which is an improvement. But there is still a substantial number of companies that will make losses,” says Forsyth, noting that Grindrod is not one of these troubled companies.

Even though Grindrod has nonshipping operations which generate profit, Forsyth says, he expects the group's earnings roughly to halve. He says the decline in shipping rates will both put Grindrod's profits under pressure and throw up opportunities for the group. “The company has been prudent and was expecting a downturn and as a result has a strong balance sheet.”

Olivier reinforces this, saying Grindrod has a strong balance sheet and “is well positioned to avail itself of acquisition opportunities that will present themselves during this market”.

He says the international credit crunch and financial crisis have dramatically reduced freight volumes in line with the slowing global economy. Volumes, Olivier says, have begun to improve, lifting shipping rates. “We would expect rates to improve further as banks' liquidity and ability to provide financing improves.”

Roots concurs and says shipping rates have started to pick up. He does not expect rates to decline to previous decade-low levels, but says they are unlikely to return to the previous highs.

The recovery of the shipping market, Roots says, hinges on the state of the global economy. “As global growth picks up, shipping rates are likely to increase.”

Source: Business Day

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