The shipping industry hauling commodities from coal to crops to iron ore is poised to return to profit for the first time since 2010 as the biggest capacity glut in its history diminishes.
Trade in the three largest dry-bulk cargoes will expand 10 per cent to a record 2.91 billion metric tons in 2014, according to ACM Shipping Group, a listed shipbroker.
Rates will exceed owners' break-even levels in 2014 for each of the four main vessel classes, according to analyst estimates. Investors can profit by buying freight swaps, which are mostly trading below the analysts' forecasts.
The industry is emerging from its largest-ever glut after record rates five years ago spurred owners to order an unprecedented number of vessels. Shipyards have built about 4300 carriers since then.
Deliveries are now slowing after earnings that fell as much as 84 per cent since 2008 curbed orders.
"We're starting on the path to recovery," said Erik Folkeson, an analyst at Swedbank First Securities in Oslo, whose recommendations on the shares of shipping companies returned 37 per cent in the past two years. "Fleet utilisation will tighten, and that's reflected in higher earnings."
The Baltic Dry Index, a measure of freight costs, almost tripled to 1947 points this year, according to the Baltic Exchange. Rates for iron ore-carrying Capesizes led the surge, jumping more than sevenfold to $US38,397 a day as China bought record amounts of the raw material used to make steel.
Shares of Nippon Yusen KK, the largest owner of the vessels, rose 57 per cent in Tokyo this year. They will advance another 4.3 per cent in 12 months. The Bloomberg Dry Ships Index of 14 transport companies added 32 per cent in 2013.
Rates for Panamaxes, the largest to navigate the Panama Canal, averaged $US7770 since the start of the year. Earnings are forecast to rise to $US12,000 in 2014, compared with a break-even level of $US11,300.
Supramaxes, the largest dry-bulk vessels equipped with cranes to move cargo, will earn $US12,000 in 2014. They need $US10,500 to break even. Rates for Handysizes, the smallest vessels in the fleet, will average $US9800. Forward freight agreements are at $US8081 and the carriers need $US9300 to be profitable.
The anticipated rally in rates depends on China because the country's imports represent 38 per cent of all iron-ore, coal and grain shipments. Japan, the second-largest destination, accounts for 13 per cent of cargo demand.
China's $US8.23 trillion economy will expand 7.4 per cent next year, the weakest pace in 23 years. That is still more than three times the global average. Japan's growth will slow to 1.55 per cent in 2014 from 1.9 per cent this year.
Other parts of the shipping industry are also contending with capacity gluts. The ClarkSea Index, a measure of earnings for vessels across the merchant fleet, averaged $US9259 a day this year, the lowest annual figure since at least 1990. The surplus of the largest crude tankers is the biggest since the mid-1980s, according to Fearnley Consultants AS, a research company in Oslo.
Overseas Shipholding Group, the biggest US tanker operator, sought bankruptcy protection in November, about a year after second-ranking General Maritime Corp took the same step.
The surplus in dry-bulk shipping is the biggest since at least 1986, according to London-based Clarkson, which characterises it as a record. The fleet expanded 71 per cent since 2008 as trade grew 31 per cent. Total capacity will increase 4.8 per cent next year, the least since 2003, the shipbroker predicts.
Shipyards, mostly in China, South Korea and Japan, built enough extra capacity since 2008 to carry about three years' worth of western European iron-ore imports.