Wednesday, January 18, 2012

Baltic Dry Index May Give Shipping Companies a Glimpse of the Future

Depressed Measurement Educates a New Generation
Shipping News Feature

WORLDWIDE – In May 2008 all was well with the world and those who earn their living centred around the shipping of bulk freight commodities munched happily on their expensive lunches blissfully unaware of what was to happen to them over the next six months. The Baltic Dry Index, cruising on a high at well in excess of 11,000 points was about to start an unprecedented nose dive into the 1100’s by October, a point it hit last Thursday since which it has dropped further.

Headlines at the time now look strangely familiar, the Guardian concerned that the Chinese economy was running out of steam, the ‘Herculean efforts to stimulate growth’ the demise of the banks with the hope that the various stimulus packages would kick start the economies and some consoling anyone who would listen that this was merely a glitch like so many before. For many the BDI is the tool to use as it reflects demand for all the dry bulk goods, coal, iron ore and grain upon which the engine of manufacture and supply depend. What it doesn’t do however is reflect the over supply of vessels to carry the raw materials it uses to calculate the market.

By December 2008 we saw the BDI drop even lower into the 600’s before beginning a slow struggle back to something like a respectable level. It must be faced however that in the past three years, although it has occasionally topped 4,000 the Index has again been on a steady downward slide until this month registering the lowest point in the last three years.

The pain this time has not been so fast and acute, more the terminal illness than the fatal heart attack, but the slow decline can in some measure be extrapolated to other trades, oil tankers and freight container shipping being the obvious parallels, however as time moves on it seems for many industry analysts there is no clear long term pattern and the only certainty is uncertainty.

History of course is a great teacher and the current situation can be probably more accurately assessed if one is willing to accept some unpalatable facts. The first of these is an obvious correlation between the degree of oversupply of potential carriers in each individual trade plus the restrictions imposed by an often declining commodity market. The different ways transport suppliers involved in each of the three trades determine the cost of their services, fixed consignment rates against sliding indices, is bound to confuse the picture but the result is the same.

With financial difficulties facing so many, particularly in the West, spending has been reduced and thus less product in all sectors is required, those heady days three or four years ago produced what we call the ‘sweet shop’ effect. Because one outlet is making money one should not be tempted to build another identical shop next door, this has the effect of not only splitting the available trade but imposing double the overheads yet this is exactly what many companies have done, the effect of falling orders of course only exacerbates the situation.

The new build tonnage now sliding off the blocks in the Far East and elsewhere is a result of the orders placed by exultant executives who couldn’t see the second tranche of the boom and bust scenario. Now we are faced with the prospect of the current level of trade becoming the norm for the foreseeable future. As we have said previously LNG and agri product (gas and food) are the new black. Oil, for so long the liquid gold for the shipping masses faces an uncertain future in the long term as whole economies try to wean themselves off a diminishing and ever more expensive supply chain. It may be the thing this week for some, but don’t bet the farm on that situation remaining indefinitely.

In the case of general freight we have already seen an amalgamation in the box carrying sector with former rivals teaming up to fight the pressure on rates as tonnages fall. Container ships capable of carrying 14,000 TEU are without doubt the most efficient method for the transfer of long distance freight, but only when they are loaded to reasonable levels. Here again overcapacity is the enemy of the liner companies, a shot in the foot for many, possibly a shot in the head for some others and only a rebalancing of the market, or unanimity of rates, the bête noir of regulatory authorities, will restore what many see as the status quo.

Recently we have seen all the problems of the industry encapsulated in one company. SeaFrance which finally foundered last week was a microcosm of the situation. The roll on-roll off (RoRo) freight and passenger ferry company started life in a rising market adding a touch of je ne sais quoi to the services from Dover to the Continent. It speaks volumes that the wallowing hulk has not been liiterally refloated by rivals due to the intransigence of the French Court and EU law meaning the potential saviours it seems will now operate a completely new service using around a third of the original French staff.

For LD Lines and DFDS who say they are to operate in place of SeaFrance it means the opportunity to either buy the now defunct vessels at a knock down price, something they offered to do at the height of the crisis, or simply draft in other ships that are being underused on other routes. Either way, there is a compression of the overall ferry market with a ‘streamlining’ of the complement of staff at sea and on shore; as always, the highest price is paid at the lowest levels.

So what can we expect in 2012? Certainly, like the Baltic Index, there simply isn’t too much further to fall, almost the entire shipping industry faces a period of real austerity during which the authorities must tighten up on the cost cutters, those who use old, unseaworthy ships flying obscure flags of convenience and leave the trade smaller, wiser but much more efficient and in the hands of those with the wit to survive the difficult times.