Buy one, get four free. That's the kind of deal you can get if you paid last year's freight rates today. A year ago, the daily hire for a medium-sized ship for carrying iron ore, grains, coal, and cement was about $90,000. Today, you can hire the same ship for $18,900.
After 18 months of sizzling rates, a falling freight market ought to be great news for commodity markets. Actually, it may well be the final straw for traders. ET helps you join the dots between a crashing freight market and poleaxed Indian exports.
The global shipping market is sinking. This week, the Baltic Dry Index, which tracks rates for vessels carrying bulk commodities on the world's busiest 26 routes fell to its lowest level since July 2006. From the look of it, it is unlikely to recover any time soon.
There are three reasons for this titanic plunge. One, the collapse of the global financial markets has had a ripple effect on the freight market as well. The BDI is seen as a good indicator of future economic growth or contraction as it is based on the shipping of raw materials that eventually ends up in finished goods.
Because the demand for shipping varies with the amount of cargo that is being traded, and the supply of ships is much less flexible than the demand for them, the index indirectly measures global supply and demand for commodities. If the index rises, it indicates a strong outlook, and if it falls, this suggests a weaker economic outcome.
Two, when traders and banks unwound their positions in freight futures, it led to a collapse in the spot charter rates as well. Forward freight agreement traders, investment banks Goldman Sachs and Morgan Stanley, along with major commodities and mining giants, which charter thousands of ships annually are now scrambling to exit the market. That has led to panic in the market.
Some of the world's largest listed shipping companies, whose fortunes are closely linked to the BDI, have also seen their stock come under pressure.
Three, freight rates are under pressure due to a slowdown in demand for commodities such as iron ore, cement, grains and steel. The biggest impact has come from a slowdown in Chinese imports of raw materials. The world market had been expecting Chinese factories to resume importing raw materials after the Olympics.
This expectation fell short when China said it had ample inventory of metals and other raw materials in the pipeline. With hardly any demand from the world's biggest factory, shipping has dwindled. The smaller freight forwarders are now fiercely undercutting the bigger players, making it even more difficult for the bigger companies to hold on.
