Baltic Index: How "low" is low?

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Monday, 01 December 2008

Dry bulk shipping stands between a rock and a hard place, with the rock being the continuous plunge of freight rates and a hard place being the inability to gain access to funding, which could help things and provide liquidity, so needed these days among ship owners. The index tracking transport costs on international trade routes fell 18 points, or 2.5 percent, to 715 points, according to the Baltic Exchange. The measure has fallen 94 percent from a record on May 20 and is at its lowest since January 6, 1987. Only during last week, the index tumbled by 14.5 percent, with everyone wondering how long will this last, with Weberseas’ latest report describing the situation vividly by raising the question of “whether the shipping world should gear-up for an "old wild-west" related market environment where owners will be competing for a "fistful of dollars". After all, the fact that during last week a modern capesize fetched a mere $1,000 per day for a spot trip, couldn’t be more characteristic of the collapse of the market.
According to Weberseas “the uncertainty still remains at least for the short run or at least until the shipping market sees some light in the end of the tunnel as far as the financial crisis is concerned, with letters of credit in particular. It is estimated that 80% of the world trade is based on letter of credits who have been badly hit. We tend to believe that letter of credit is the major cause of this sharp fall in freight rates as a result of the sudden stiffening of cargoes moved world-wide”. 
Despite the fact that more and more countries are pouring money into their ailing banking systems, or even making deals (like Pakistan) with IMF and other organizations, in order to boost their economy’s liquidity, the global economy is headed for a recession, with more countries added to the list on a weekly basis. As far as the dry bulk market is concerned, China’s resilience to these adverse economical conditions will prove crucial and from the look of it, the country responsible for the larger part of the shipping boom seems poised to face a negative impact. After all, Chinese exports were directly headed for developed economies, exactly those suffering these days.
Of course, there’s still hope. For instance, raw materials stock piles in Chinese ports are slowly decreasing, which could point to a re-stocking, i.e. imports needed soon. Until then, ship owners will be on the lookout for investment opportunities, hoping for an improvement in the credit market, which has ultimately frozen. In fact, Mr. George Xiradakis, head of shipping consultants XRTC, urged bankers to remain calm amid this crisis, maybe the worst ever seen, and keep their faith towards the shipping industry. Speaking at ELINT’s (Hellenic Institute of Marine Technology) annual conference, Mr. Xiradakis mentioned that banks must trust ship owners in these difficult times, a trust which should be there, given the great track record of owners, in terms of their credit worthiness. Needless to say that, banks were handing out $53.6 million on a daily basis as financing towards Greek ship owners for the period between 2006-2008, when during 2004-2006 the relative amount stood at $29.6 million. But, when even the leader in shipping financing, at least among Greek owners, Royal Bank of Scotland faced severe problems due to the credit crisis, it seems that things can go even worse, before they get better.