In recent months the shipping industry has seen the rates for vessel charter continue to slide, with forecasts for 2012 looking equally bleak. The Baltic Exchange’s primary index for the shipping of dry commodities fell to a 3 year low last week, as the slowdown in the Chinese economy and a chronic oversupply of certain vessel types began to bite. On the 19th January the index fell to 893 points, well below the crucial 1000 point marker which indicates marginally favourable rates and earnings for those in the shipping sector. Its value has been halved in less than a month. The global economic slowdown is mooted by industry analysts as a likely contributor to this drop, as demands from the tiger economies of the East for commodities begins to ease, and the West continues to squeeze spending on consumer goods.
The weather gods have also had a hand in the recent cuts in the indices for dry shipping, with heavy rains in Australia and South America resulting in miners having difficulty extracting and moving their raw commodities. Average daily earnings for Capesize vessels, capable of carrying up to 150,000 tonnes, reached $8,498 a day last week – their lowest since May 2011. Clarkson Plc, the world’s largest ship broker, estimates that Capesizes make up approximately 40 percent of the global fleet of commodity shipping, which highlights how much earnings have slid for many commodity shippers.
Compounding the problem, the freight market is heavily oversupplied with vessels, following a construction splurge authorised during the boom times before the economic crisis hit. Many firms in the freight sector failed to forecast the duration of the current economic crisis, resulting in new ships being launched which have no cargo to transport, nor much of a prospect of shipping for 2012. Shippers may have been influenced by what the Handy Shipping Guide calls the ‘sweetshop’ effect, whereby just because one outlet is making money, one should not be tempted to build another identical outlet next door. The effect is a splitting of trade, and a doubling of overheads.
Market commentators have been asking whether this collapse in freight costs is the precursor to a fall in commodity prices, as the two are fundamentally connected. Indeed, the Baltic Index is viewed as an indicator of the health of the global economy. This appears not to be the case this time - the detachment between freight and commodity prices has become increasingly apparent, as global commodity prices have remained reasonably buoyant since the rise out of 2008/9 recession, whilst the Baltic Dry Index has slumped. The pain for shippers isn’t over yet, though - Export Development Canada forecasts that shipping capacity will grow by another 7 per cent in 2012, which can only drive prices down.
In contrast to the dry commodity shipping market, global demand for LNG tankers has continued to increase. Due to the dearth of LNG tankers, and the significant price premium currently available for gas in Japan and the Far East, spot tanker rates have continued to climb to record highs, with vessels sitting in the $150-155,000/day bracket – if they can be found at all. With only 2 new LNG tankers due to be launched in 2012, and Japan’s short-term reliance on gas to replace nuclear power set to continue, market analysts expect these spot prices to continue to rise. In contrast to the buoyant spot market, long-term rates are expected to become increasingly squeezed as these take into account the 50 to 60 new tankers that are expected to start operating over the next three years.
Posted by David Balchin on the 27th of January 2012
