Friday, November 28, 2008
Dry bulk shipping rates approach all-time low
Friday, 28 November 2008
The recent months' collapse in dry bulk shipping rates has been unprecedented in its severity, the head of the body that organises the key shipping market said yesterday, as a key market index hit its lowest level since January 1987. Jeremy Penn, chief executive of the Baltic Exchange, told the Financial Times in an interview that the Baltic Dry Index was now close to its all-time low in 1986 and conditions were now more extreme even than then. However, he condemned companies who were trying to escape old contracts struck at the previous higher rates.
The index - which measures average rates in the short-term spot market to charter ships to carry iron ore, coal and other bulk commodities - reached 763 points yesterday, 93.5 per cent down from the all-time record high of 11,793 points hit on May 20. Rates for the largest ships, known as Capesizes, are down 98.8 per cent from the record $233,988 per day set on June 5 to $2,773 yesterday.
The collapse, resulting from the financial crisis, a dispute between Chinese steel mills and Brazilian ore producers and slowing economic demand, has had widespread secondary effects, including bankruptcies among shipowners.
"The violence of the movement, the violence of the correction are unprecedented, particularly in the Capesize market," Mr Penn said. "The sudden and extreme lack of demand for freight has left everybody stunned, I suppose is the best word to use."
The Baltic Exchange hosted an emergency summit last week, attended by 450 people, to address the problems created by the market collapse.
The conference criticised some companies' refusal to honour long-term contracts struck at the old, higher level.
Mr Penn said he had no proof of claims that some charterers, in order to escape contractual obligations, were claiming demand for their products had disappeared then chartering ships at the market's new, much lower, levels. "I would certainly disapprove of anyone who failed to meet their obligations unless they were in dire financial straits," he said.
However, he confirmed the market was considering complaints about some companies that could lead to exchange members being warned about the dangers of dealing with them. He particularly criticised market participants who defaulted, knowing their countries' laws would make them hard to pursue. Many involved in the market believe some Korean and Chinese companies have been the most serious offenders.
"What we regard as unacceptable is simply reneging on contracts and relying on inaccessibility in terms of jurisdiction and geography to protect you," he said.
The market problems are being exacerbated by uncertainty surrounding ships that were the subject of several different charter contracts. Many operators in the boom years chartered ships then chartered them on to other operators for a slightly higher fee, creating chains of agreements as many as 12 long.
Participants in such chains are now nervous they could collapse if just one participant suffers financial problems. Some have already been hit by the collapse of Ukraine's Industrial Carriers and UK-based, New York-listed Britannia Bulk.
Mr Penn said there was little the Baltic could do to clarify the risks with existing contracts. But in future, it might create a link between companies' obligations in the physical shipping market and the freight derivatives market, so they would be better able to hedge their risks.
As Adapted from Financial TImes
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