Bulk shipping exec pins BDI collapse on credit crisis
In a conference call last week, Khalid Hashim, CEO of Thailand-based Precious Shipping, explained the reasons, as he saw them, for the dramatic decline in the Baltic Dry Index, the measuring stick for dry bulk rates.
'The deteriorating credit line led to the collapse of the BDI over the past few months, while little has changed in terms of fundamental demand and supply for dry bulk shipping,' according to notes from the JP Morgan-organized call, which took place Oct. 17. 'Hashim thinks urbanization and economic advancement, which have been driving the demand for dry bulk shipping, remain unchanged. However, due to lack of trade credit, real demand is converting into potential demand and disappearing from the market.'
Hashim said that a lack of credit globally will delay the introduction of bulk vessels on order. The current orderbook accounts for roughly 50 percent growth of the current market.
'Hashim estimates that lack of funding will spread the delivery schedule of the current order book from four years to eight years, and increase in scrapping activities as a result of a deteriorating trade environment will further reduce the capacity growth,' the JP Morgan report said. 'So the actual capacity growth could be as low as around 3 to 4 percent year to year.'
He said the current order book funding requirement, estimated to be $504 billion, 'is impossible for the current finance market to accommodate.'
The report said that Hashim recalled that, in 1986, the last time when freight markets were below the 1,000 point mark on the BDI on a sustained basis, ships as young as seven to eight years old were scrapped.
'So, he believes the amount of scrapping could amount to 130 million tons and easily double or even treble if the market were to see a sustained downturn for 12 to 18 months.'
Hashim predicted that the recovery would begin in 2010, but by then, demand will have surpassed supply.
'It is possible that by (the second half of 2009), all the excesses in the financial system would be purged, in his view,' the report said. 'Very little funding would go into paper or derivative trades. Instead, a' mountain of money' would come into traditional trading activities and hence cargo could reach very high levels in (the second half of 2010). Therefore, at end-2010, there would be very little supply but a 'mountain of demand.' The BDI, post (second half of 2010), could look very much like, if not stronger than, what we saw between 2003 and 2008.'
But Hashim emphasized that the fundamental value of the BDI is still sound.
'On May 20, 2008, it was at the 11,793 point level,' Hashim said. 'As of yesterday, it was down to 1,506 points. Therefore, it has lost more than 86 percent of its value. Regarding the real fundamental difference between the demand and supply for ships between May 20, when the market was at an all-time high, and yesterday, there has been no such significant change at all.'
Bulk shipping exec pins BDI collapse on credit crisis
