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Thursday, April 16, 2009

Is Global Shipping Dead-In-The Water Until 2010?

Thursday, 16 April 2009

International agencies over the past month have fallen over themselves to come up with the most bearish forecasts for global trade in 2009. The World Trade Organization's forecast of a 9% decline was topped by the OECD's forecast for a 13% decline, both representing the most serious contraction in trade in the post-war period, and compared to a 25% in global trade during the Great Depression of the 1930s. These bearish scenarios seem to be at odds with what stock prices globally are trying to discount, i.e., those "greenshoots" of recovery that economists have to pointing to lately.
The bear case, as outlined in an April 9 article in The Times Online states that global shipping rates will plunge 74% in 2009 on falling commodity demand in Asia and a glut in vessels ordered during the boom years. The collapse in shipping rates could push dozens of shipowners into bankruptcy--after a 92% plunge in the BDI (Baltic Dry Index) last year. Under this scenario, problems will continue well into 2010, with another 15% drop in shipping rates foreseen that year. Currently, about 10% of the world's 10,650 in-service container and bulk carriers are sitting idle.
A more upbeat view is that the industry could see signs of revival over the next six months as the clouds of global recession dissipate. The financial crisis has hit the dry bulk segment hardest, while tanker rates are down only 20%~30%. First, the scenario of plunging commodity demand in 2009 is suspect because investors are seeing commodity prices revive. Secondly, shippers are now scrambling to reduce capacity by scrapping older ships and replacing them with new, more energy efficient models, and are pushing for rate hikes from May on shipments such as containers to the US.
(source: Dry Ships. BDI is a weighted composite of BCI (cape), BPI (panamax) and BSI (supramax) rates.
As the highs in the BDI hit in 2007 had reached true bubble proportions, a sustainable level would be something more like levels seen in 2004-2005. The BDI after plunging over 90% saw a big bounce of nearly three-fold, followed by noticeable consolidation. However, the index is still well above late 2008 lows and is not expected to violate these lows--making the 74% further decline in rates for 2009 much less likely. Cap and panamax rates are recently again on the rebound, while supramax rates remain weak.
Prices of Japanese shipping stocks have long since crashed, and are now bumping along the bottom. While there is no hurry to jump in, these stocks are showing a nice basing for a belated move after lows are re-confirmed.
Source: iStockAnalyst