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 767 since Jan. 1, 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 (U.K.) 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, Denmark-based analyst at the Baltic and International Maritime Council, the trade group whose members control 65 percent 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 percent 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.

Running Costs

Capesizes, the largest vessels in the Baltic Dry Index, earned an average of $6,358 a day this year, according to the Baltic Exchange, which reports rates on more than 50 maritime routes. The ships need $7,758 to cover running costs, rising to about $16,000 once debt repayments are included, according to Moore Stephens LLP, a London-based accountant that tracks the industry’s expenses, and Pareto.

Rates may rise as high as $9,750 in the second quarter, 24 percent more than the current cost of forward freight agreements for the period, said Abeele. He brokered the first FFA in 1992 when he was at Clarkson’s securities unit and now advises a hedge fund trading the contracts. The vessels will earn an average of $11,500 this year, according to the median of nine analyst estimates compiled by Bloomberg.

Panamaxes, the second-biggest component of the Baltic Dry Index, averaged $6,427 daily this year. They need $6,606 to cover running costs, rising to about $11,000 including debt, according to Moore Stephens and Pareto. Earnings will average $9,000 this year, about 7 percent more than the current price of swaps, according to the analysts surveyed by Bloomberg.

Spot Market

“The downside is basically non-existent,” said Abeele. “We cannot justify selling this market because the underlying spot market is so low.”

Some owners’ refusal to take cargoes at current rates can be seen in shipping data. More than 2,400 dry-bulk carriers were anchored last month out of a global fleet of about 8,500, compared with annual averages of less than 1,000 in 2009 and 2008, data compiled by Bloomberg show.

A rebound in rates may be curbed because of the scale of the capacity glut. The fleet of bulk carriers expanded 63 percent to 591 million deadweight tons since the start of 2008, according to IHS Fairplay, a Redhill, England-based research company. That compares with a 28 percent gain in dry-bulk cargoes, Clarkson estimates.

The International Monetary Fund cut its 2013 forecast for global growth in trade to 3.8 percent in January, from 4.5 percent. About 90 percent of world trade travels by sea, the Round Table of International Shipping Associations estimates.

Iron Ore

The 17-nation euro area’s economy will contract 0.1 percent this year after shrinking 0.6 percent in 2012, according to the average of 54 economist estimates compiled by Bloomberg. Europe buys about 14 percent of all seaborne iron ore and coal, according to Clarkson.

Growth in Japan, which buys 14 percent of the world’s coal and iron ore, will slow to 1.2 percent this year from 2.05 percent in 2012, according to the median of 51 economists surveyed by Bloomberg.

China, which accounts for about 65 percent of seaborne demand for iron ore and 18 percent of coal shipments, lacks a sustainable growth model, outgoing Premier Wen Jiabao said March 5. The two commodities are the biggest sources of demand for dry-bulk shipping and China is the largest importer of both, according to Clarkson.

Oil Tankers

The nation’s economy started accelerating again for the first time in two years in the fourth quarter. China’s iron-ore imports will advance 8 percent this year, from 9 percent in 2012, as demand for thermal coal used in power plants gains 10 percent, from 41 percent, Clarkson estimates show.

Losses for dry-bulk vessels extend across most of the merchant fleet. The ClarkSea Index, which also includes rates for container ships and oil tankers, averaged $8,284 in February, the lowest since at least 1994, according to Clarkson. The Baltic Dirty Tanker Index, a gauge of oil-shipping costs, fell 12 percent this year.

Shares of Pacific Basin Shipping (2343) Ltd., the largest member of the Bloomberg Dry Ships Index, rose 9.2 percent this year and will retreat 2.3 percent to HK$4.64 in 12 months, according to the average of 17 analyst estimates. The Hong Kong-based operator of 189 dry-bulk carriers will report profit of $31.3 million this year, after a $158.5 million loss in 2012, the mean of 13 estimates shows. An e-mail to the company’s investor relations department seeking comment wasn’t answered.

Global Fleet

STX Pan Ocean (STX) Co., which has the second-largest weighting in the index, gained 14 percent this year in Singapore trading and will advance 12 percent to S$6.30 in 12 months, the average of 11 estimates shows. The Seoul-based company also operates oil tankers and car carriers. An e-mail to the company seeking comment wasn’t answered.

Demolitions will exceed 20 million deadweight tons for a third consecutive year in 2013, according to Clarkson. That will combine with fewer orders for new ships to slow fleet growth to 7 percent, from 10 percent in 2012, Clarkson estimates. Outstanding orders at shipyards are equal to 17 percent of existing capacity, down from a record 74 percent in 2009, IHS data show.

“Owners’ hands will be forced by the prolonged period of low earnings,” said Will Fray, a senior analyst at Maritime Strategies International Ltd., a London-based research company. “It’s a cyclical industry, so it’s more a time to buy.”

Source: Bloomberg