It’s hard to remember while watching the plummeting Baltic Dry Index of ship charter rates how recently people were convinced it would stay high for months. The index, which hit an all-time record 11,793 points on May 20, fixed at 1,506 points — down 87.2 per cent from its peak — on Thursday. An owner could expect to charter out a Capesize dry bulk carrier — the biggest kind – for more than $230,000 a day in late May. He could expect around $11,600 now, well below most estimates of operating costs for new vessels.
But, just as it was important not to draw too many conclusions from the rise, it’s vital not to over-theorise about the fall. The outlook for ships moving coal, iron ore, wheat and other bulk goods is not good, but probably not as bad as the BDI makes it look.
The BDI is a spot market index, based on deals struck to move goods immediately. A few too many ships at a key port can send the index tumbling, while too few can send it soaring.
The recent fall partly reflects the near drying-up of spot markets because of problems over letters of credit. Letters of credit issued by the bank of a commodity’s buyer guarantee the seller that, if he fulfils his side of the bargain in arranging the product’s delivery, he will be paid. Sellers in recent weeks have been worried guaranteeing banks might disappear before they were due to receive payment. Banks are charging increasing rates to issue the letters.
Market sentiment has helped to push the index down. Charterers in present circumstances must know shipowners are desperate to arrange charters and will accept normally unacceptable prices.
Speculation is unwinding too, just as in other markets. Thursday’s Lloyd’s List, the shipping daily, led with the story of an alleged, highly surprising default by STX Pan Ocean, a reputable South Korean shipping company, on a long-term charter for a vessel from Hong Kong’s Noble Chartering. STX gave the vessel back to Noble rather than keep paying a $168,500 a day, long-term charter struck when times were far better. However, Noble Chartering had chartered the vessel from its original owner and STX Pan Ocean had chartered it on to another company. There have been many such chains of deals in recent years, with some participants hoping to make money by chartering a vessel on for slightly more than they were paying themselves. Such speculative charterers, with few tangible assets, may now abandon charters safe in the knowledge they have few assets for owners to seize in response.
Such defaults could cause further market havoc and conditions will remain tough until trade finance starts working again. But the future supply of ships should now tighten fast as partly-financed deals to build vessels fall through. Present charter rates will see many aging dry bulk ships sent for scrapping. It may be sooner than anyone expects that a shortage of ships at some Brazilian port sends the BDI shooting back up again.
Robert Wright is the FT’s transport correspondent