Friday, October 10, 2008
I believe many of my readers especially those in the industry are seeing a slide off never before experienced in current times. From a high of 11,000 to the Baltic Dry Index trying to hang on to 2200.
Obviously the bigger picture of economic crisis is the big picture, yet the speed of the decline is extremely disturbing to say the least. The last time the Baltic was at this levels, Oil was not at USD 80 per barrel.
The underlying meaning is that lesser demand due to less trading is taking place across the world. if you are in the industry, you can already see the tons of vessels spot open in the market. Just a few months back, it was impossible to get a good vessel unless you are willing to pay top dollar, now the reverse is true, most cargoes as long as firm are likely to be fix quickly and snapped up by increasing desperate owners.
Shipping has often being labeled a barometer of a nation's growth. This is definitely true as there is lesser exports or imports which means goods and commonalities are in less demand.
Now the one big real fear is that the Baltic is getting squeeze even further is that Traders are increasing finding it tougher to trade commodities and goods because of the increasing reluctance by banks to issue Letters of Credit. Of course, if they decide not to honor existing letters of credit, then all hell breaks loose.
First, let us go back to how a trader trades commodities (goods)
a) He/she finds say grain from US and agrees to purchase X amount
b) The trader will then find a suitable buyer located in another part of the world who agrees to buy this same grain at X+Y price (Y being the profit margin for the Trader)
c) The trader will then sign the contract with the buyer of the cargo in US and the buyers will arrange with his/her banks to issue letters of credit agreeing to pay X+Y amount to the trader when such cargo is stowed on board a vessel.
d) The trader also then sign the contract with the seller of the cargo in US and arrange with banks letters of credit agreeing to pay X amount when such cargo is stowed on board a vessel.
e) Banks will require certain documents such as Bills of Lading (issued when cargo is loaded onto vessels), Quality certificates and invoices etc and allow the Seller to bank in the Letter of Credit to obtain cash.
Now the scary part is that either the actual buyer of the grain cargo or the trader himself is having problems obtaining credit in the market. The trade will not go through then.
Even scarier will be the notion that all parties can obtain letters of credit but the banks themselves are finding excuses or reason to NOT HONOR such.
Although there is so far no actual example of such happening, it is not exactly out the equation given the current economic climate. Nobody will now honor any letters of credit from any Icelandic banks now will they?
IT IS A FACT THAT BANKS ARE VERY RELUCTANT TO ISSUE ANY LETTERS OF CREDIT NOW. SO THERE YOU GO, IT IS A VERY VERY BAD TIME TO BE DOING BUSINESS.