Comments Heard Admist The Plunging Baltic Dry Index

Thursday, October 23, 2008

Yes, the Baltic Dry Index continued its plunge yet again.

I have collected some of the recent comments heard around...

China is expecting a severe downturn in shipping. China Shipping Container Lines, China's second-largest container line, expects a 10% volume shrinkage this year. Bloomberg quoted Zhang Denghui, assistant president, saying that "Traffic will drop at least 10% for the full year. An even much larger drop is possible, as the full impact of the global economic turmoil is yet to come."
Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. "Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay."

He says another reason for the big fall in the index has been a number of new ships have arrived on the market just as global trade is slowing down. - David Osler of the Lloyds List shipping journal

"The global economic slowdown will push some shipping lines into bankruptcy," Marc Faber, a famed investor and editor of the "Gloom Boom & Doom" report, told AFP.
Malaysia's Port Klang said it had been hit by a decline in cargo handling since the start of October, blaming a retail downturn and lower vehicle sales in the United States and Europe.
Shanghai International Port said that growth in cargo traffic dropped sharply to 9.9 percent in the first half of 2008 on the "increasingly grave global economy and trade situation".
"Faced with the severe economic situation at home and abroad, the port industry has met with the most complicated operation environment in recent years," it said.
"We are seeing a rapid decline in the volume of exports," an official with the Japanese Shipowners' Association said of the decline in demand.
"It's a safe statement that no carrier is operating profitably in the eastbound transpacific market today," said Ron Widdows, chairman of the Transpacific Stabilization Agreement -- a forum of major shipping lines.

“Shipping is an entrepreneurial game, and there are people losing their shirts at the moment,” executive director of the Australian Shipowners Association, Teresa Hatch, says. “But it might be the bust that we had to have. "Shipyards have been so far behind on meeting demand, people have been waiting up to four years for a ship.”
Whole shipping lines have frozen up, according to a Business Spectator report on Tuesday, because shipowners don’t want to take the risk of carting cargo for clients that may not be able to pay because of the credit crisis.
“Like many of the other clogged arteries of global finance, letters of credit and therefore global shipping could presumably unclog fairly quickly if the interbank credit market got moving again,” wrote the article’s author, Alan Kohler.
“But a big fall in shipping rates, as measured by the key price indicator, the Baltic Dry Index, is always a harbinger of a downturn in trade and therefore economic activity.”

A trade adviser based in Sydney, Sri Annaswamy, wrote to me last night to correct me, explaining that it’s not that shipping is being affected by the credit crisis – it’s that banks don’t want to open or honour letters of credit “that they know would ultimately be defaulted upon due to the Chinese buyer’s refusal/inability to accept the shipment (that’s the core of the problem)”.

“Traders who hire ships on spot basis are facing difficulties to secure letters of credit from banks,” said an executive at Chowgule Steamships Ltd, who did not want to be named. Letters of credit assure a shipper of payment for a cargo after it is loaded on a ship, but before the buyer receives it.
The squeeze on trade credit is also restricting commodities shipments. Around 90% of the world’s $14 trillion (Rs683 trillion) trade is handled via trade credit, the SCI official said.
“You don’t know the credit worthiness of the guy hiring the ship... The best and the biggest of names are defaulting,” said an executive at Apeejay Shipping Ltd, who too did not want to be named.

Other recent postings made on the Baltic Dry Index: