Monday, January 19, 2009
Tight global liquidity further drags down weak freight market
Monday, 19 January 2009
Shipping companies appear to be facing delays in issue of Letters of Credit (LC) due to the tightening global liquidity position, which is further dragging down an already weak freight market. The shipping industry hinges heavily on LCs, which is a guarantee issued by a bank that the buyers’ funds will be transferred to the seller after the traded goods are properly received. This is more so because of the time lapse between the cargo delivery by the seller and cargo receipt by the purchaser — it is estimated to take anywhere between 15 and 45 days to complete one voyage, with a typical parcel size ranging between 10,000 tonnes and three lakh tonnes.
“Tightening liquidity, the world over, impacted issue of LCs, further slowing global trade,” the latest study by Karvy pointed out.
However, some shipping companies say that there have not yet faced any problems on the LC front. “There may have been some stray incidents, but we at Essar have not yet faced any problems (on this score),” says Mr V. Ashok, Director and CFO of Essar Shipping and Logistics Ltd.
Downward journey
Freight markets continue their downward journey, especially in the dry bulk sector. The Baltic Dry Index, which touched a peak 10,844 last year in May, fell to 7,403 in August, 4,975 in September, 1,808 in October and 743 in December. In the first week of January 2009, the index hovered between the 770 and 830 mark. The index, a composite of the Baltic Capesize, Panamax, Supramax and Handysize indices based on dry bulk shipping routes, measures on a time charter and voyage basis.
In other words, the index fell by a whopping 94 per cent since May 2008, leading to liquidity damage. “The freight rates are below their breakeven points and it is difficult to secure time charter to cover their operating costs. The time charter earnings from Cape Size vessels have declined from $168,530 per day to $10,478 per day over the one-year period. Ships are operating on marginal pricing and some have already fixed at zero charter rates, leaving no gain to the ship owners,” the Karvy report points out.
The demand for dry bulk shipping is primarily driven by three commodities — iron ore, coal and grains. It was the slowdown and falling commodity prices that triggered the fall in the dry bulk freight market.
However, analysts say, the freight future market is still relatively active. Even though the spot market is weak, the future contracts are available at a significant premium, indicating positive outlook in freight rates by market participants.
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