• ITVI.USA
    15,415.310
    54.710
    0.4%
  • OTLT.USA
    2.761
    -0.007
    -0.3%
  • OTRI.USA
    21.110
    -0.300
    -1.4%
  • OTVI.USA
    15,387.520
    55.710
    0.4%
  • TSTOPVRPM.ATLPHL
    3.300
    0.000
    0%
  • TSTOPVRPM.CHIATL
    3.140
    0.190
    6.4%
  • TSTOPVRPM.DALLAX
    1.590
    0.150
    10.4%
  • TSTOPVRPM.LAXDAL
    3.330
    0.020
    0.6%
  • TSTOPVRPM.PHLCHI
    2.170
    0.020
    0.9%
  • TSTOPVRPM.LAXSEA
    4.080
    0.130
    3.3%
  • WAIT.USA
    125.000
    -1.000
    -0.8%
  • ITVI.USA
    15,415.310
    54.710
    0.4%
  • OTLT.USA
    2.761
    -0.007
    -0.3%
  • OTRI.USA
    21.110
    -0.300
    -1.4%
  • OTVI.USA
    15,387.520
    55.710
    0.4%
  • TSTOPVRPM.ATLPHL
    3.300
    0.000
    0%
  • TSTOPVRPM.CHIATL
    3.140
    0.190
    6.4%
  • TSTOPVRPM.DALLAX
    1.590
    0.150
    10.4%
  • TSTOPVRPM.LAXDAL
    3.330
    0.020
    0.6%
  • TSTOPVRPM.PHLCHI
    2.170
    0.020
    0.9%
  • TSTOPVRPM.LAXSEA
    4.080
    0.130
    3.3%
  • WAIT.USA
    125.000
    -1.000
    -0.8%
American Shipper

BDI hits bottom

BDI hits bottom

Baltic Dry Index collapses, reaching a six-year-low

And dredging up bad memories for ship ovners.



By Eric Johnson and Chris Dupin




      Ronald Reagan was president and Max Headroom was considered cool the last time the Baltic Dry Index got as low as it did in October, hitting 663, a level not seen since 1986.

      Indeed, businessmen and investors involved in dry bulk shipping may have felt a bit like Max, who got his name because the last thing he saw before slamming his head into a wall was a sign reading 'Max Headroom 2.3 meters.' A bit like seeing the BDI drop in less than seven months to 5.6 percent of its all time high of 11,792 on May 20.

      The index is a benchmark based on the estimate of the price of moving commodities such as coal, iron ore and grain by sea on 26 key dry bulk routes in handysize, Panamax and capesize dry bulk carriers.

      Some capesize ships – dry bulk carriers capable of carrying 100,000 tons or more of cargo – saw their spot charter rates fall to $2,316 per day, less than 1 percent of the record high of $233,988 recorded in June.

      The collapse has been pinned on a number of factors – the credit squeeze that has made banks reticent to offer letters of credit to cargo owners and charterers, slowing demand from China, and the impact of the global economic downturn.

      The share prices of dry bulk shipping companies collapsed with the BDI:

            ' DryShips from a 52-week high of $116.43 to a low of $3.04.

            ' Genco Shipping and Trading from $84.51 to $6.43.

            ' Eagle Bulk Shipping from $36.24 to $2.55.

            ' Diana Shipping from $41.10 to $6.85.

      One company, Brittannia Bulk Holdings, filed for protection from creditors in bankruptcy court.

      While there was an uptick in the prices of the stock of many of these companies in mid-December as this issue of American Shipper was going to press, it was not clear where the dry bulk market or the stocks of companies involved in the business was headed. Indeed, prices of the companies were so low that there was speculation that management might buy up shares and take the companies public.

      Charles Rupinski, senior equity analyst for Maxim Group, had said that dry bulk shipping companies were expected to benefit this past fall from a slight strengthening in China's economy after the Olympics, but it did not come.

      China's large steel industry balked at iron ore price increases being demanded from Brazil's Vale do Rio Doce, the world's biggest iron ore producer. That brought nearly to a halt a huge trade, mostly carried in the big capesize vessels. Also, if China buys ore from Australia or other closer suppliers rather than Brazil, it reduces demand for ships.

      In late November HSBC Shipping Services Ltd. said, 'We hear of 200-plus capes, about 25 percent of the fleet now sitting idle and of up to 100 million tons of iron ore stocks at Chinese ports and steel mills, about four months of consumption once blended with local iron ore supplies.'

      Indeed, demand for capesize ships was so slow this fall that Basil Karatzas, a broker at Compass Maritime Services in Ft. Lee, N.J., said a market inversion occurred for a few weeks where, in some instances, smaller ships were commanding better rates than large vessels because of their flexibility.

      On a day in early December when the Baltic Exchange was reporting the charter equivalent rate for a capesize ship was $2,316 per day, it was quoting a rate of $4,499 for a 60,000- to 80,000-deadweight-ton Panamax ship and $6,244 for a 52,000 dwt handymax vessel. But a week later the market was beginning to right itself, with capesize ships beginning to command the highest price.

      While capesize ships are largely restricted to moving cargo such as iron ore and coal on a limited number of routes such as Brazil to China, smaller handy and supramax vessels can trade a much wider range of cargoes and call at many ports. Even if shippers have trouble finding demand for 50,000 dwt of cargo, they can easily move parcels of cargo for several shippers and keep their vessels trading.

      Don Frost, a Stamford, Conn.-based consultant and broker, noted that handy and supramax vessels are often used for moving building materials such as aggregate and cement, and have benefited from the fall in commodity and transport prices, which now makes sourcing raw materials over longer distances more attractive than it was earlier this year.

      In fact, as dry bulk shipping stocks began to recover in mid-November, some were attributing it, in part, to expectations of increased infrastructure spending by the Obama administration.

      Even if demand for dry bulk shipping picks up this year, Clarkson Research Services shipping economist Martin Stopford notes that the bulk shipping market faces the specter of a huge influx of tonnage, with 66 million dwt slated to be delivered or 16 percent of the existing fleet. Twenty-three million dwt are expected to be scrapped and 5 million dwt to be converted.

      'Given the state of the dry bulk market, any of these numbers could be challenged,' Stopford wrote. 'But to get the bulk fleet growth down to a more manageable 6.5 percent would mean 'losing' about 20 million dwt, through heavy slippage or demolition. Even in the grim 1980s bulker demolition never exceeded 12 million dwt in a year.'

      Many investors believe dry bulk stocks will rebound when credit loosens up, but Rupinski said there is also a great deal of concern by investors about the creditworthiness of counterparties who charter ships and whether companies will be able to continue to meet loan covenants or continue to pay heavy dividends.

      Loan covenants are often based on the value of a company's fleet, and he said relatively few ship sales have been made in recent weeks, making valuation of assets difficult.

      Another factor is the conversion of tankers into dry bulk carriers, something that has surreptitiously expanded capacity while demand from China has slowed.

      'On the supply side, a lot of people look at supply growth as only the newbuildings supply being added to the market,' said Johnson Leung, regional shipping analyst for JP Morgan's Asia Pacific region.

      But the very large ore carriers' 'conversions from tankers to dry bulk ships might have also taken some effect in the current demand and supply situation. Year to date, about 24 new capesize vessels have been delivered. Another 14 VLOCs have been delivered but are not on many analysts' radar screen. Fourteen VLOCs are almost as much as 28 capesizes in terms of deadweight ton capacity, which means the actual capacity growth is twice as much as many people thought. Therefore, in August, when the loading figures were still very high, the BDI was already on a free fall.'

      'While a drop in freight rates would be an immediate effect of a falling BDI – which would be beneficial for exporters or importers of food and commodities – a declining index is also accompanied by reduced demand for shipping services, increasing the effects of the financial crisis and global demand for goods,' said a November report from the United Nations Conference on Trade and Development. 'Shipping operators faced with considerable losses may also decide to scrap older tonnage, which has potential implications for steel prices as well as for jobs in major ship-breaking nations including Bangladesh and Pakistan. The declining BDI has also led international port terminal operators to announce the suspension of some major port expansion plans owing to the foreseen decline in demand for shipping services.'

      The fall of the BDI is severely affecting the ability of ship owners to break even, much less profit, with rates at near rock bottom.

      '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., told Bloomberg in late October.

      'It can't go much lower than this without owners deciding they don't want their ships employed,' said Khalid Hashim, chief executive officer of Thailand-based Precious Shipping, when the index hit 1,500 in mid-October that a further fall would make many operations unviable.

      'If the BDI drops any further, say to the 1,000 point mark, then at that level the ship owners would start to lose cash,' he said.

  


'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.'
Khalid Hashim
chief executive officer,
Precious Shipping

Hashim detailed the reasons for the BDI collapse in an October conference call with JPMorgan.

      '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,' Hashim said. '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.'

      The credit issue is a serious one, he maintained.

      'Generally, when a seller and a buyer of commodity conduct a transaction, the seller opens a letter of credit onto the buyer, which allows the buyer to ship goods and encash the money,' he said. 'The problem arises when the buyer tries to cash the goods, but the letter of credit sent by the bank is not being honored. This is when trust in the trade evaporates. This type of trust in the trade has gone out of the window and people within the trade circles have confirmed that major banks – not small banks, but quasi-nationalized banks – are refusing to honor the documents they have issued because they don't have the money to fund it.'

      Hashim said a lack of credit globally would delay the introduction of bulk vessels on order. The current order book accounts for roughly half the growth of the current market.

      Although supply has been growing at 7 percent a year the past five years, the demand side has been growing even faster, creating a 'ballistic' market that induced orders for ships that will introduce millions of tons of capacity into the market.

      The problem is that the credit freeze has chopped down demand as well, with the help of global financial turmoil, just as the bulk vessel supply side is set to explode. For instance, the capesize sector will see a doubling of capacity over the next three years. Coming into a market that is already seeing iron ore vessels being chartered for literally $0 a day, that's not great news.

      The last time the BDI was below 1,000 points on a sustained basis, in 1986, ships younger than 10 years old were scrapped. Hashim said that if the market remains stagnant for 12 to 18 months, the number of ships 15- to 20-year-old that would be scrapped could be staggering.

      Against a proposed 140 million tons of capacity entering the fleet in the next three years, 60 million tons will definitely be scrapped and as much as another 30 million to 60 million tons could go. That would essentially bring down the new capacity added to 20 million tons, or only about 4.6 percent of the current 434 million tons of capacity.

      The more likely scenario, however, is that about 80 million tons of capacity, or 18.4 percent, are added, but over a longer period of time.

      'This 80 million tons of ships would now be produced over an eight-year period,' he said. 'This is not a big exaggeration or a big ask. It is quite normal. This is what would happen if the financial turmoil and the credit squeeze currently plaguing the world continue, even for 12 months more. It would put back a lot of these newbuildings and the 80 million tons would be produced over almost eight years instead of three years – which means an additional 10 million tons per annum.

      'Looking at this 10 million tons per annum on a base of the 254 million tons that is there, it doesn't appear frightening any more. This works out to less than 5 percent of additional supply.'

      He said the current order book funding requirement, estimated to be $504 billion through 2011, 'is impossible for the current finance market to accommodate.

      'This $504 billion doesn't sound like something that most normal people can understand,' he said. 'It can be explained as follows: $504 billion spread over from now to end-2011 is equivalent to $345 million per day, or at least $4,000 per second, per day, beginning July 1, 2008 and ending Dec. 31, 2011. This is the quantum of funding needed.

      'On Oct. 14, when I was at the Marine Money conference (in Singapore), there must have been 100-plus shipping bankers in the audience. I challenged any banker in the audience to tell me that this number could be funded, and how would they go about doing it. There was complete silence in the audience and not a single banker took up the challenge. So, even they realize that funding $4,000 per second, whether purely from debt, or partly from debt and partly from equity, is a real challenge and is impossible.'

      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.

      '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.'

      And he emphasized that the fundamental value of the BDI is still sound.

      '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 (mid-October, when the BDI was at about 1,500 points), there has been no such significant change at all,' he said.

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