Company to buy new ships, taking advantage of rock-bottom prices and a looming shipping turnaround.
Timing is crucial in the maritime world: Late-to-port means money lost. Cargill, an old hand in shipping, knows this well, and has decided to buy its first new vessels in years — at a time of rock-bottom prices.
Since 2001 Cargill, a major force in ocean shipping, has followed a strategy of exclusively chartering, or leasing, ships. But Cargill has recently signed a letter of intent with a Chinese shipyard to buy an undisclosed number of new vessels.
New vessels are selling at bargain prices because of a ship glut after the post-2008 meltdown in the global shipping business. But the industry seems to have hit its nadir, and long-term prospects for freight rates are finally improving.
“It is a good time to buy ships, ” said Jurgen Sorgenfrei, a Frankfurt, Germany-based maritime economist with global research firm IHS Inc. While not commenting on Cargill directly, Sorgenfrei was referring to vessel and freight dynamics in key markets Cargill serves.
The Minnetonka-based agribusiness giant has long been involved in waterborne shipping, originally an outgrowth of its stature as a grain merchant. Today, about 30 percent of the company’s ocean cargo is generated by its own operations; the rest comes from third parties. Dry bulk — the output of mines to farms — is Cargill’s main calling card.
And at any given time, 400 to 500 Cargill-chartered ships are plying the world’s seas. One might be carrying iron ore from Brazil to Thailand, another coal from Australia to China. And of course, there’s grain, from ships departing the U.S. West Coast for Japan to occasional port calls in Duluth-Superior.
Privately held Cargill doesn’t break out financials for its myriad businesses, but shipping looks like it’s weathered the industry’s storm. “Cargill Ocean Transportation has been a good business, even in the past couple of years,” said Roger Janson, the Geneva, Switzerland-based head of the operation.
Cargill has formed a ship-buying venture with two other equity partners, whom Janson declined to name. The venture intends to purchase an undisclosed number of “capesize” ships. Such ships in today’s market cost over $40 million. The builder is Shanghai Waigaoqiao Shipbuilding.
Capesize is the largest type of dry bulk ship, with a capacity of 100,000 to 180,000 tons, though some behemoths carry over 300,000 tons. The vessels got their name because all of them once were too big to fit through the Suez or Panama canals, forcing them to travel around Cape Horn or the Cape of Good Hope. They primarily carry iron ore and coal.
Continued reliance on leasing
Despite its planned ship purchases, Cargill will rely mostly on vessels it charters for weeks to several years. “The market has changed, as has the business, and owning a certain amount of vessels makes sense at this time,” Janson said.
While chartering is in tune with Cargill’s “nimble and agile” shipping strategy, owning some ships improves Cargill’s flexibility, Janson said. For instance, some vessel owners restrain charterers from sailing through risky waters known to be pirate havens.
Pirates often take hostages for ransom, and a ship’s crew is employed by the vessel owner, not the charterer. “But Cargill has customers in those [pirate] regions, ” Janson said. He added that ships sailing in privateer-infested waters usually have armed guards aboard.
There’s another very good reason for Cargill to become a ship owner now, as Janson put it: “We believe assets are competitively priced.”
Indeed, Erik Nikolai Stavseth, an analyst at Oslo, Norway-based Arctic Securities, said in an e-mail that shipyards are willing to build vessels at inflation-adjusted prices not seen in over 20 years. “The reason Cargill is looking at acquiring new tonnage now is that new-build prices are at VERY low levels.”
According to a recent report by Global Hunter Securities, a new capesize ship can be ordered for about $46 million, down from $99 million in August 2008. “New-build prices could be at or near the bottom,” wrote Natasha Boyden, a New York-based Global Hunter analyst.
The other side of the shipping equation is freight rates, and they are still in the tank. The Baltic Dry Index, a key yardstick, has hit a 25-year low in recent months, according to a report by Arctic Securities. Rates sunk after a brutal one-two punch.