NEW YORK, Dec 6 (Reuters) - Dry-freight capacity should remain full for at least the next two years, until new ships scheduled to hit the seas exceed demand for cargo freight, said Paragon Shipping Inc’s PRGN.O chief executive.
And, continued strong demand for commodities will keep shipping rates high for some time to come, Michael Bodouroglou, Paragon chairman and CEO, told Reuters in an interview.
“For the next two years the supply of ships on order is more than covered by demand. We are in a situation where there is almost 100 percent utilization of the fleet and this is why rates are so strong,” the CEO said, adding that Paragon’s ship bookings secured its revenues for the next 22 months.
But risks jeopardize timely delivery of ordered ships.
“By 2010, we may have supply of new ships that will outstrip demand. We may. But there are many undetermined factors that can influence this outcome,” the executive said.
For example, many ships have been ordered from shipyards not yet built, that may never get built, or built with a delay. Or, shipbuilding can take longer than expected, builders may miss the delivery schedule or fall short on quality specifications.
“Another factor that may influence ship deliveries is the credit crunch we have seen showing its teeth. About 70 percent of the existing order book for new ships has not secured financing. If credit becomes tighter, at least a portion of these new ships may not be delivered,” the CEO said.
Whether ships get delivered or not, Bodouroglou said he thinks demand for commodities will stay tight for a long time. Curtailed ship deliveries may slow the rate of infrastructure building, but will not hamper raw materials use.
“The effort to connect freight rates with commodity prices has been attempted for many years. In my professional career I have seen that it doesn’t work this way. Freight rates are driven purely by supply and demand of the commodities.”
He sees the huge appetite for commodities continuing for years to come because of booming economic growth in India, China, Asia and elsewhere.
“We are in a very tight supply/demand situation that creates a lot of volatility. In my business I have learned not to look at the spikes and troughs, but to look at the mean. And the mean is going to be at a high rate for at least the next two years,” Bodouroglou said.
Athens-based Paragon’s customers ship mostly iron ore, grains, coal, and fertilizers, with 65 percent going to Asia and much of the raw material coming from Brazil and Australia.
In August, Paragon launched its stock on the NASDAQ to expand its 10 ship fleet to an eleventh, arriving this week.
The CEO said some of Paragon’s customers want to renew their charters long before the contracts expire.
“This is quite unusual. I think it reflects their expectation that the market is going to be strong,” he said.
Tight supply/demand has also created backlogs mostly in Brazil and China’s ports, which the executive said exists to some extent in most areas of the world. Some of the congestion occurs from further backlogs moving commodities inland.
“It’s not uncommon in China, but it’s prevalent everywhere to various degrees. We are seeing unprecedented volumes. And the infrastructure in most countries are not enough to cope with them in an efficient way,” the CEO said.
The trillion-dollar a year shipping industry, which carries 90 percent of the world’s traded goods by volume, was recently targeted for emitting close to two percent of the world’s climate warming carbon dioxide.
While Paragon has a strict environmental policy, including never discharging into seas, Bodouroglou said he thinks governments need to monitor emissions, and industry efforts to improve its record include talk of changes in fuel composition, and more efficient engines, equipment, and hull designs. (Reporting by Carole Vaporean; Editing by John Picinich)