Sunday, November 16, 2008

Shipping: Holed beneath the waterline

UK Independent | Hold on to your hat: the Baltic Dry Index was down at 826 points yesterday, (actually 841 - this article's a week old - the trend is what matters) a shattering drop from its high of 11,793 in May.

The index, which tracks the price of shipping bulk cargo, might not sound like a reason to choke on your cornflakes. But it is an unparalleled, if subtle, barometer of the global trade in economic building blocks like iron ore, coal and grain – and it is telling a worrying tale.

Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.

As if that wasn't dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.

Peter Kerr-Dineen, chairman of Howe Robinson shipbrokers, said: "The scale of change in rate is utterly staggering – the market has come down from super-boom territory to pretty close to bust, effectively in two months."

Contracting demand for imports inrecession-wary economies across the world is a factor, as are steadily falling commodity prices and the mechanics of supply and demand in the shipping industry itself. But the real trouble is less obvious, largely unprecedented, and potentially devastating.

The wheels of international shipping are greased with "letters of credit"issued to buyers of bulk cargo by their banks. These guarantee the value of the shipment once it is in transit but before it is delivered. The problem is that the credit crunch, with the resulting liquidity problems in the international banking sector, is taking its toll on the availability of these entirelyroutine instruments. "We have the hugely worrying and unprecedented development where there are perfectly creditworthy shippers and receivers unable to open perfectly standardletters of credit," Mr Kerr-Dineen said.

Cargos are sitting on docksidesbecause the finance is not available to ship them, with the gravest implications for the future. "This is a nuclear bomb in the freight market, and in world trade," Mr Kerr-Dineen said. "Liquidity has to return because if there isinsufficient money to provide standard finance, world trade will be sharply cut back and economic growth willimplode."