When you are looking for examples of precipitous declines, it’s hard to beat the plunge in value of Greek bonds. But in January the Baltic Dry Index has come close, putting in a truly dire performance and falling in that single month by about 50%. The index – which tracks international shipping prices – had sunk to 647 by last Friday. That took it below the previous low of 662, reached in December 2008 in the wake of the global financial crisis.
The Baltic Dry is often viewed as a proxy for world trade, but as WiC explained in issue 71 (when it stood at 1,901) interpreting falls in its value has become more complicated. Many experts think its sagging performance is more to do with the size of the shipping industry, which faces a crisis of oversupply.
Hence last week the New York Times described a scene at one port of “mile after mile of empty cargo ships, as far as the eye can see”. Then the article moved on to the financial ramifications: “As recently as six weeks ago large freighters that can carry bulk commodities like iron ore or grain were fetching charter rates of $15,000 a day. Now brokers and owners say the going rate is $6,000.”
“There is a massive overcapacity issue,” Tim Huxley, the CEO of Wah Kwong Maritime Transport told WiC. He’s not surprised by this, mind you: he predicted just such a situation in an earlier interview with WiC in July 2009 (see WiC24). Even back then it was evident that shipyards were churning out too many new vessels.
Between 2009 and the end of last year the global fleet increased from 459 million deadweight tonnes (dwt) to an estimated 600 million dwt, according to Eshiptrading.com.
But Huxley says January was a “perfect storm” for the industry, and that explains the awful decline in the Baltic Dry.
Why? Typically, a huge proportion of new ships are delivered in the first month of the year (it’s to do with registration plates). This January the fleet grew, for example, 14% versus a year earlier. But the impact of the sudden increase in supply was worsened by two key factors hitting demand for shipping: China shutting down for a week of Lunar New Year celebrations, and bad weather disrupting trade routes from Australia and Brazil.
“I don’t think anyone expected the Baltic Dry to go below 662, although everyone was expecting a tough quarter,” says Huxley.
Meanwhile freight rates have fallen so sharply that some shipowners are pulling back from the market. “You have owners now saying they will not offer their ships for cargo at these levels and they are contemplating lay-up.”
The grim state of the sector was also on show at an auction in Hong Kong in mid-January. A tanker called the Sam Ho Dream was put up for sale by a bank, which had repossessed it. Four years ago it had changed hands for $135 million. This time it sold for just $29.2 million.
Huxley thinks this will be a record year for scrapping old ships – which will help to start addressing the oversupply problem. Around 5 million dwt was sent to the breakers in January alone (last year a total of 39.5 million dwt was scrapped).
Huxley hopes that the Baltic Dry has bottomed – it rose for the first time since December 12 on Monday. Another positive: he points out that cargo volumes remain higher now than they were in 2008.
Those brief moments of optimism aside, it isn’t hard to fathom the other industry facing crisis: the shipbuilders. Alongside the Koreans, the Chinese dominate this business, and shipyards will face a quandary as they seek new orders. That’s because the going rate for selling a newly-built capesize bulk carrier has dropped to about $44 million. Industry insiders say that shipyards usually claim $55 million is their breakeven price.
Of course, this pre-supposes that Chinese yards can get new orders at all. This is proving a challenge for a number of ship manufacturers, says the China Daily, which notes that some “are on the brink of bankruptcy”. It cites the example of Taizhou-based Jingang Shipbuilding. One of its directors admitted to the newspaper: “We haven’t received any orders since last year.”
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