CMA 2013: Caution urged over Africa dry bulk hype

Shipping investors should be aware of the challenges presented by exporting raw materials from Africa, says ICAP’s Georgi Slavov.

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Continent’s logistical constraints limit vessel demand

AFRICA may have been billed as the final frontier for the dry bulk market, but shipping investors should be aware of the challenges presented by exporting raw materials from the continent, according to ICAP freight and basic resources managing director Georgi Slavov.

At CMA Shipping 2013, Mr Slavov warned of the logistical constraints that were limiting business development in the mining sector.

“A lot of things are happening in Africa and it’s a really interesting place to be and to do business, but the problem is that markets don’t have mercy,” he said.

The 35 mineral projects in Africa that ICAP is monitoring would equate to an additional 30m-40m tonnes of iron ore and coal per year in the market, but Mr Slavov pointed out that most of this was theoretical mining capacity, some of which had been delayed or cancelled indefinitely.

“Expectations of this market are getting less and less bullish,” he said.

Transporting commodities to the coasts was sometimes costing as much as the mining itself, and even that is reliant on the countries involved approving logistics infrastructure.

In January, mining giant Rio Tinto reported that of a $14bn impairment charge in its 2012 full-year results, $3bn of that related to its Mozambique coking coal project where it had hoped to move the coal down the Zambezi River but it had not secured approval from the government.

“Even if a certain amount of this volume comes to the seaborne market, it will be serviced by smaller types of ships,” said Mr Slavov.

“There are only four ports in Africa at the moment that can take capesizes and only another two that are theoretically under construction and scheduled for 2015.

“Around 85%-90% of this new volume will be handled on handysize, supramax and up to panamax bulk carriers, something that any investor should keep in mind.”

Another point Mr Slavov made about bulk carrier trading patterns was that the expansion of the Panama Canal was likely to have little effect on existing market trends.

“There will be no impact. Why? To answer this you need to understand trade flow dynamics of the region – the grain out of the US and thermal coal out of the US and Colombia,” he said.

The expanded canal will allow bulkers of a maximum 120,000 dwt to transit when 98% loaded. However, these are not grain vessels as the cargo sizes traded internationally are much smaller and it will be a long while before they increase in size to fill a mini-capesize.

In addition, thermal coal exports out of the US “are going down like a stone as the shale gas boom is killing coal mining” and although Colombian exports to Asia could be cheaper – depending on canal transit fees – it will still not be competitive enough on pricing to compete with coal from the Pacific.

“It will be very difficult to sell substantial volumes out there to have a meaningful impact,” he said.

Charles R Weber projects group manager Basil Mavroleon pointed out that very few panamax bulk carriers actually transit the waterway, despite being named after its current maximum dimensions.

“Panamaxes go the graveyard having never gone through the Panama Canal. The emphasis is still on the container, not the bulker,” he said.

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