Freight rates go negative | FT Alphaville

Freight rates go negative

Negative bond yields, negative repo rates, and now… negative freight rates. At least route-specific ones.

Bloomberg has the story here (our emphasis):

Glencore International Plc (GLEN) hired a commodity ship with the operator of the vessel earning nothing and contributing to some of the fuel costs after freight rates for hauling raw materials had their worst-ever start to a year.

Glencore chartered the vessel, operated by Global Maritime Investments Ltd., a Cyprus-based company with offices in London, at minus $2,000 a day for the first 60 days of the charter, Steve Rodley, GMI’s U.K. managing director, said by phone today.

The shipment is Australian grains to Europe and it will put the ship in a better position for its next cargo, he said. “Our other option was to stay in the Pacific and earn poor revenues or ballast to the Atlantic and pay the fuel ourselves,” Rodley said.

Ballasting refers to sailing without a cargo. The Baltic Dry Index (BDIY), a measure of commodity shipping costs, advanced 1 point to 648 points today, according to the Baltic Exchange in London. Last month, the gauge plunged 61 percent for its worst start to a year on record.

And here for context is the slump the BDI has experienced thus far this year:

The idea of a ship operator chartering a vessel for free and discounting fuel costs, of course, does make sense if the charter helps to relocate the ship to a more lucrative location. The shipping business is completely route specific.

The current plunge also comes against the backdrop of a major vessel overhang, with ships over-ordered before the 2008 crisis still being delivered to what is now a hugely oversupplied market.

aSome say the overhang compromised the BDI’s status as a leading economic indicator as far back as 2009 as a result:

Luckily, according to ICAP’s shipping analysts, operators have finally started to convert or demolish older vessels in an attempt to restore balance to the market:

Though as ICAP also noted, it could be difficult to incentivise operators to scrap or demolish vessels much further:

So at what level does one predict scrapping for 2012? To answer we have to look to see who has the most to gain and who are those able to. An owner with just modern tonnage has little room to manoeuvre, and owners with just older tonnage are likely sitting on a paid off asset requiring only levels above operating costs to be in the money. Therefore the answer lies with those that have both old and modern tonnage — it is in their interest to remove their older vessels to help revive the supply/demand balance to help lift rates to more profitable levels for their newer vessels.

All in all, it’s a tricky situation since the dynamics encourage overt rate fragmentation. Operators with older unleveraged assets (paid off in full) can now afford to charter vessels at extremely low rates (even negative), whilst those operators who have newly acquired (leveraged) stock are restricted to charging rates that ensure a break-even rate on their financing costs.

The consequence of letting the latter slip up on payments, meanwhile, doesn’t even bear thinking about given the European banking industry’s exposure to the industry.

Now, if only there was a buyer of last resort for all that ageing shipping inventory?

Perhaps floating islands aren’t such a bad idea after all…

Related links:
Shipping costs fall to 25-year low
– FT
Chinese New Year and the BDI – FT Alphaville
The most bearish chart in the world today
– Money Week
Explaining the Baltic Dry sell-off – FT Alphaville
Prepare for a junk-bond deluge in shipping
– FT Alphaville