The extreme financial situation of late 2009 make the traditional use of the Baltic Dry Index as a leading economic indicator questionable.
See WikiPedia article. See also two marked-up Bloomberg articles, below.
By Alaric Nightingale
Nov. 27
(Bloomberg) -- Ship prices may keep dropping for at least another
year because banks have not yet dealt
with the weaker loans they made to the industry, according to Michael
Drayton, a former chairman of the Baltic Exchange.
The cost
of a second-hand capesize used to haul iron ore plunged 66 percent to
$53 million since July 2008. The cost of a second-hand supertanker
slumped 52 percent to $77 million, according to data from the
London-based bourse.
“There’s trouble building up
behind the dam, and the dam is going to be breached,” Drayton,
now an independent shipping consultant in London, said in an
interview. “The market is blocking the natural flow to where it
should be.”
Drayton predicted in December 2007 that the
supply of commodity carriers would exceed cargoes in 2008. The
Baltic Dry Index, the benchmark for commodity shipping rates, fell 94
percent from May to December 2008 as Chinese steelmakers cut
iron-ore purchases, trade finance dwindled and fleets expanded.
Tankers and container ships are
most overvalued, based on their current earning power, said Drayton,
who was also previously a director at shipbroker Galbraith’s
Ltd. and chairman of Hamilton, Bermuda-based Arlington Tankers Ltd.
Earnings for commodity carriers
may also drop because they are too reliant on Chinese demand, he
said. China is the world’s biggest consumer of iron ore and
coal.
“My worry is: can China really prop up these
rates single- handedly?” he said. “I just don’t
think China can prop things up indefinitely.”
Drayton
said he has been approached by private-equity funds and institutional
investors seeking advice on when to buy distressed loans and the
ships tied to them.
To contact the reporter on this story:
Alaric Nightingale in London at Anightingal1@bloomberg.net
Baltic Dry Index Drops Below 1,000 for First Time in Six Years
By Alistair Holloway
Oct. 28 (Bloomberg) -- The Baltic Dry Index, the benchmark for commodity shipping costs, fell below 1,000 for the first time in six years as the lack of credit curbed global trade and shipowners threatened to shun orders.
The index, watched by banks including UBS AG as an economic indicator, fell 66 points, or 6.3 percent, to 982 points, the lowest since Aug. 8, 2002. The gauge has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
``You are getting very, very close to the cost of just crewing and running a ship,'' Richard Haines, a senior director at London-based shipbroker Simpson, Spence & Young Ltd., said in an interview today. ``It can't go much lower than this without owners deciding they don't want their ships employed.''
The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982. The Bank of England today estimated losses on asset-backed debt, corporate bonds and other securities in the U.K., U.S. and Europe had more than doubled since April to about $2.8 trillion.
Zodiac Maritime Agencies Ltd., the shipping line managed by Israel's billionaire Ofer family, said this month it may idle 20 capesize ships, which typically haul coal and iron ore. That's about 5 percent of the fleet operating in the spot market.
Shipowners are also slowing down vessels to cut fuel costs. The average capesize is sailing at 8.54 knots, down from 10.33 knots in July. Capesizes are attracting rates of $7,340 a day, close to daily operating expenses of about $6,000, according to Henrik With, a shipping analyst at DnB NOR Markets ASA in Oslo. Daily rates for smaller panamaxes fell 8.1 percent to $6,413.
Failing Shippers
Fearnley Fonds ASA, an investment bank specialized in shipping, energy and oil services, expects a ``significant'' number of commodity shippers to fail within two years.
Britannia Bulk Holdings Inc. has ``severe'' financial difficulties and a ``very high risk'' of being in default on a $170 million loan, the London-based commodities shipping line said in a statement distributed by Market Wire today.
Industrial Carriers Inc., a Ukrainian operator of about 55 vessels, filed for bankruptcy this month.
The London interbank offered rate, or Libor, fell 4 basis points today to 3.47 percent for three-month loans, the British Bankers' Association said. It was the 12th straight drop.
The three-month Libor for dollars remains 197 basis points above the Federal Reserve's target rate for overnight loans of 1.5 percent, up from 81 basis points about three months ago. At the start of the year, the spread was 43 basis points.
Awaiting Recovery
Credit markets began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007. They froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15.
Shipping lines also have to contend with slowing growth in demand for most commodities. The S&P GSCI index of 24 raw materials has dropped 31 percent this month, its worst performance since at least 1970. Any turnaround for shipping markets may not come this year, according to Stuart Rae, joint managing director at M2M Management Ltd. in London.
``Towards the early part of next year I think we will have more liquidity and cash in the market, and more trading being done and the market picking itself up from the floor,'' Rae said in an interview today.
OAO Severstal, Russia's largest steelmaker, and other producers are cutting output, sapping demand for iron ore and coking coal. The two commodities will account for about a third of the 3.2 billion metric tons of dry bulk goods shipped this year, according to Drewry Shipping Consultants Ltd.
To contact the reporter on this story: Alistair Holloway in London at aholloway1@bloomberg.net
Last Updated: October 28, 2008 12:10 EDT