The Global Shipping Halt
Is The Great
Unwind Disrupting The Freight Market?
London, UK - 19th November 2008, 23:04 GMT
Dear ATCA Open & Philanthropia Friends
[Please note that the views presented by individual contributors
are not necessarily representative of the views of ATCA, which is neutral.
ATCA conducts collective Socratic dialogue on global opportunities and threats.]
Freight shipping prices for transporting dry raw materials
have collapsed in November 2008. The Great Unwind is like a Tsunami that
is engulfing and halting the shipping world at an accelerating rate. The
Baltic Dry Index sounds like a weather report, but what it really does is
track the price of shipping bulk cargo -- such as coal, iron ore, cotton
and grain. Recently, the Baltic Dry Index has fallen through the floor.
It has slumped by nearly 95% over the past five months. In real dollar terms,
at the peak of the market in June, a 170,000-tonne Capesize bulk carrier
cost USD 233,988 to rent. Recently, it was available for USD 4,793 - that
is a crash of 98% and is below the cost of paying for crew, insurance, maintenance
and lubricants. Why?
1. Of the USD 13.6 trillion of goods and materials traded worldwide per
annum, 90% rely on letters of credit or related forms of financing and guarantees
such as trade credit insurance. International shipping works on "letters
of credit." These financial guarantees are issued to buyers of bulk
cargo by their banks. This system has greased the wheels of global trade
for the last 400 years by transferring payments internationally from buyer
to seller once shipments have been delivered. With the collapse of the credit
market - and banks now sitting on their hands, refusing to lend - the fast-moving
wheels of global shipping have come close to halt.
2. There is a collapsing demand for credit driven expensive product purchases
like cars and as a consequence, the transport of associated raw materials
and sub-assemblies. Auto sales are falling in double digit percentages across
most of the G7, ie, the US, Japan, Germany, UK, France, Italy and Canada.
The pace of car sales growth is slowing down across most of the remaining
G20 nations as well, including China and India.
This is a massive disruption in the freight market with asymmetric consequences
for world trade, which poses systemic risk for many nation states. Liquidity
has to return because if there is insufficient money to provide standard
finance, world trade is being sharply cut back and economic growth is not
only stalling but likely to implode. If cargo trade stops, a whole lot of
supply chain disruptions start. For example, if the iron ore does not go
to the refinery, there is no plate steel. If the plate steel does not get
shipped, there is nothing to fabricate into components. If there are no
components, there is nothing to assemble in the factory. If the factory
closes the assembly line, there are no finished goods. If there are no finished
goods, there is nothing to restock the shelves of the shops. If there is
nothing in the shops, the consumers cannot buy. If the consumers cannot
buy, there can be no sales!
On a more sobering note, if bulk shippers cannot buy cargoes, then a lot
of US and world grain could end up rotting in warehouses while big portions
of the world go hungry. For example, the Saudis are the biggest importers
of food in the Middle East. They probably have the money to pay cash for
their food shipments and may not therefore need letters of credit. But for
the approximately 2.7 billion people in the world who spend 80% of their
income on food, a disruption in the global shipping trade could mean the
difference between quiet poverty and going hungry day-in, day-out. That
will not last for long before there is social disorder on a massive scale.
The Baltic Exchange based in London is the world's leading maritime marketplace.
Their dry index, a measure of shipping costs across different ship sizes,
hit a record high of 11,793 points in May but has since fallen by 93% to
815 points last week. The UN Conference on Trade and Development (UNCTAD)
has said that the financial crisis had begun to affect international trade,
noting sharp falls to key shipping indices. Much lower shipping costs mean
national markets are more contestable by foreigners, which should limit
the ability of domestic firms to raise prices and therefore this should
reduce the possibility of inflation. We can safely conclude that the majority
of The Great Unwind's forces moving through the markets now seem to be deflationary,
and not inflationary.
The ravaged worldwide demand for cargo ships is due to the chronic global
financial crisis affecting credit availability, an unprecedented synchronised
economic downturn across most of the major national economies in the world
caused by massive demand destruction, and the resultant collapse in commodity
prices. At the same time, container rates in the Asia-Europe routes have
plummeted by around 75% this year and a price war between companies seems
to be driving rates lower and lower, destroying the profitability of container
shipping and placing huge stresses on companies struggling to meet their
commitments. A significant component of the dramatic decline in shipping
indices has been due to the difficulty in arranging trade finance during
the credit crunch. Demand has been slashed because the global credit squeeze
has made it very difficult for buyers to attract funding. At the same time,
perceived counter-party risk in the physical markets has slowed trading
to a trickle, exacerbating the freight slide. Many big players involved
in the shipping of dry commodities and goods cargo are unwilling to trade
with some parties fearful of their financial footing. There are big chains
of owners of the chartered ships in the supply chain, so if someone goes
bankrupt half way through the chain, it has a knock-on domino effect for
everybody else. Another problem is that there are quite a significant number
of players walking away from cargoes at present. So anyone who has taken
cargoes to hedge the vessels they have chartered is now finding themselves
with the ship without the cargo to carry.
ArcelorMittal, the world's biggest steelmaker, on November 5th said its
global output will decline by more than 30 percent. Cia Vale do Rio Doce,
the world's biggest iron-ore producer, said last month that it will cut
production.The fall in demand for many raw materials, which began at the
beginning of June, first squeezed the profit margins of producers since
they faced fixed high raw material costs and falling prices for their finished
products. This was followed shortly by a squeeze of freight costs as they
tried to pass the pressure from the profit margins to the freight market.
One could be forgiven for not noticing what the world has experienced in
recent years by way of an unprecedented growth in shipping and shipbuilding,
fuelled by cheap imports from Asia and the seemingly unstoppable rise of
economies such as China and India with their insatiable demand for raw materials.
For some time charter rates went through the roof and reached a zenith in
May/June this year and demand for new ships out-stripped supply. A different
picture is now emerging. Companies are starting to struggle with too many
ships chasing ever decreasing rates.
This slump not only means a fall in revenues but also less revenues to service
debts. In turn, the current 'credit crunch' means extreme difficulties for
struggling shipping companies seeking to raise capital. UNCTAD revealed
in its annual maritime transport review that the world's merchant fleet
had expanded to a record 1.12 billion deadweight tons, with the order book
for new vessels reaching a peak of 10,053 ships in 2008. However, from mid-2008,
companies were cancelling new ships on order, even when they were losing
their 10% deposit in tens of millions of dollars. Mitsui OSK Lines (MOL),
Japan's largest bulk shipping company is said to be considering laying-up
and even scrapping vessels as revenues collapse. MOL may mothball some of
its largest vessels. The company is considering scrapping seven of its Capesize
dry bulk ships from its fleet of a 100 vessels. This suggests that MOL may
be getting ready for a protracted down turn lasting several years. Reports
are already filtering through of companies seeking sheltered waters to lay
up their giant vessels to weather the financial storm. Just as in the days
following the oil crisis in 1973, we could see the same happening with the
great lumbering bulkers and container vessels, which now seem less and less
attractive as they ply the waters with their great bellies less than full.
In the space of less than half a year we have seen the shipping world ride
the crest of a massive globalisation expansionary wave and then plunge into
a financial storm that could sweep most vessels off our oceans, and with
them, companies who cannot weather the crisis caused by The Great Unwind.
We welcome your thoughts, observations and views. Thank you.
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