The Baltic Dry Index, which tracks freighter charter costs, is at a 22-year low. Rates in the global shipping market have fallen precipitately from a record high to levels last seen after the 1970s oil price shocks. Shipping is an industry of peaks and troughs, usually in three-year cycles. Rising commodity prices, disrupted trading patterns and rapid gross domestic product growth raise charter rates.
This prompts orders of new-builds. Older ships continue trading to take advantage of good rates. As the new-builds are delivered over the next 12 to 18 months, rates collapse. Older ships are sent for breaking and the cycle starts again.
Cyclical trough. Since 2003, a five-year super-cycle has appeared, with rates climbing steadily, particularly in dry trades connected with the steel industry, but also for container vessels and energy carriers. Global GDP has grown for a prolonged period at an annual 4% to 4.5%, led by industrialization in China, which has been growing at rates approaching 10% a year for five years. The global financial crisis terminated this, though no one was prepared for the rapidity of the collapse, with the Baltic Exchange's dry bulk index going from 11,793 on May 20 to 715 on Nov. 28.
Fleet structure. The new-build order book to 2012 may decline by at least 10%--and more if the slump is prolonged. The financing necessary to complete the order book has been estimated at about $500 billion, of which only about half was in place before the global banking crash.
The resale value of modern vessels has fallen. Scrapping is increasing, but prices have fallen by more than 20%, with breakers looking for larger vessels that are easier to dismantle. Smaller bulkers built in the 1980s and 1990s are being sold to Far Eastern interests for one-third to one-half the price they would have fetched recently. This could have long-term effects for such leading European maritime nations as Greece and Norway.
Market sectors. The dry market has been hit harder than the wet, where rates have varied widely depending on route and whether crude oil, gas oil or petrol was carried:
--Dry bulkers. In late November, cancellations were reported for 241 bulkers for delivery in 2009, with massive cancellations expected for 2010-2012.
--Containers. For almost a year, liner companies have been amalgamating routes and slow steaming to reduce costs. As ships on period contracts have come off charter, rates have been renegotiated substantially downward, with most owners of new-builds accepting work in order to meet financing costs.
--Tankers. Freight rates have fallen with the oil price, as users, their storage capacity full, must first draw down stocks before they can buy cheaper product. The world tanker fleet was being modernized to meet the requirement for all crude- and product-carrying vessels to be double-hulled by 2010; only the newest vessels can still command a premium.
Fall-out. Many shipyards set up to supply the super-cycle boom will fail. Even older-established yards face lean times. Plunging ship values have wiped out the collateral value on many ship loans, exacerbating the parlous state of banks with shipping exposure.
The crisis may have a long-term effect on derivatives markets. The forward freight agreements market has grown larger than the physical market, a highly secretive market, in which counterparties ordinarily do not know one another prior to trades being completed. In October, leading players agreed to a netting process, whereby the names of counterparties were revealed in order to introduce greater transparency in hopes of reducing losses.
The slump has preempted a pending downturn, because of over-ordering by newcomers seeking to cash in on the boom, affecting mainly weaker companies without the resources to sustain cash flows, but also damaging traditional relationships between shipowners and their financiers.
Tuesday, 30 December 2008
Source: Forbes
By Toto-X
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