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Baltic Index outlook weak

London, 1 May 2011: Reuters

The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, rose for the second day on Thursday helped by modest iron ore sales to China.

The index rose 0.79 percent or 10 points to 1,269 points. Prior to the first gain on Wednesday, the index had fallen for 19 straight sessions. Brokers said iron ore and coal sales to China this week had boosted activity.

"The market is still very fragile," said Georgi Slavov, head of dry research and structured products at broker ICAP Shipping. "The more tonnage that comes onto the market, the weaker the rebound will be," he said referring to expected an commodity restocking in the coming weeks.

Floods and cyclones in Australia in February hit coal production, and some producers are still struggling to return to normal operations, hurting capesize activity. Weather-related and logistics problems at Brazilian ports have also disrupted iron ore shipments from there.

"The situation in Australia remains serious," Slavov said. "The main problem at the moment keeping the market down is that we are still missing a significant amount of cargo."

Brokers said an expected strengthening of iron ore imports into China in the second quarter was likely to provide modest support as the freight market continued to struggle with rising fleet growth. "While we believe an increase in Australian bulk commodity output could provide some modest support for dry bulk rates, we would view any incremental strength as only a short-term trading opportunity," Wells Fargo Securities said.

"We expect the sector's current oversupply of tonnage and large orderbook to act as ultimately overpowering headwinds over the intermediate-term."

The main index has fallen by over 25 percent this year as rising ship supply has outpaced demand for commodities.

EXCESS TONNAGE

The Baltic's capesize index fell 0.13 percent, with average daily earnings inching lower to $6,698 after rising on Wednesday. Capesizes typically haul 150,000 tonne cargoes such as iron ore and coal. The Baltic's main index, which tracks the cost of shipping key commodities such as iron ore, cement, grain and coal, has more than halved in the past six months to below 1,500 points, close to levels last seen during the financial crisis in 2008.

The Baltic's panamax index gained 4.17 percent, with average daily earnings rising to $11,620. Panamax vessels usually transport 60,000-70,000 tonne cargoes of coal or grains.

INSIDE DRY FREIGHT 29 APRIL 2011

While there are indications of some vessel cancellations and delays, analysts expect deliveries to gather pace between 2011 and 2012, putting further pressure on dry bulk earnings.

"We currently estimate 2011 fleet growth of 9.2 percent in 2011, with a further 9.4 percent to be built in 2012," Deutsche Bank said. "Despite strong demand growth in the seaborne dry bulk sector of 6 percent per annum over the next two years, we expect to see continued excess dry bulk tonnage. The expected delivering supply is likely to keep rates under pressure."

Ends --

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