Friday, November 28, 2008
Shipping Industry Heading for Dry-Dock
More evidence that the downturn is here to stay for good! With the amount of trade going on, it is no wonder the Baltic has dropped to the current levels. It might take a few years before we see such rates again.
Friday, 28 November 2008
Has world trade ground to a halt? Has the world's shipping fleet been mothballed? The Baltic Dry Index, which measures the cost of shipping bulk commodities from iron ore to rice around the world and is often used as a proxy for international trade, has fallen 94% from its high last May to its lowest level since 1987. But while that may look alarming, the reality isn't so bad. Goods are still being transported, albeit at a falling rate. Shipping, which accounts for about 90% of world trade is likely to decline by just 0.5% next year, according to the Economist Intelligence Unit. The cost of shipping, as measured by the BDI, may have plummeted -- shipping a ton of dry bulk between Australia and China cost less than $4 a day Wednesday compared to almost $45 in May -- but ship operators still prefer running vessels at a loss than leave them idling. But not many will be able to sustain this level of losses for long.
The dramatic collapse in shipping prices is down to a number of factors. First, the economic downturn has led to a big slump in demand for commodities. The recent boom in dry bulk ended when the underpinning Chinese demand for iron ore began to wane, thanks to local stockpiling and the economic downturn. U.S. grain exports fell by a third, or 3 million tons, month-on-month in September, and Japan's coal imports halved to just 9 million tons. Hardly any iron ore has shipped in the last couple of months. Meanwhile, exporters have been pushing for cheaper shipping rates as their own margins were squeezed by the collapse in commodity prices.
Second, the industry suffers from chronic overcapacity. Over the last two years around 50 million tons have been added to a global fleet capacity of close to 420 million tons. But in 2009 and 2010, over 175 million tons is due to come into service. Some of these orders will need to be cancelled if shipping rates are to rise.
But the most pressing issue is the scarcity of letters of credit, the notes banks provide exporters to finance the goods being transported and guarantee payment on them. Banks' heightened risk-aversion means letter prices have soared, if they're issued at all, and that hits demand as exporters are less willing to ship goods. Addressing this lack of finance should be a priority: without it, world trade could grind to a halt.
As Adapted from Wall Street Journal
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