Where is the Baltic Dry Index headed?
The Baltic Dry Index, the most widely quoted measure of shipping demand, has fallen by over 50% since its late-May highs (20 May), moving from 11,800 points to less than 5,874; the lowest level since late January.
The recent setbacks have included 200-point and 320-point retreats in the last two trading sessions, respectively. Those associating the Olympic Games in China with the drop of the index didn"t take into account that this was only a partial reason, that couldn"t have negative effects by its own.
Industrial activity in China was put in a halt from June onwards, reducing the number of cargoes available, thus adding pressure to the BDI. But, with production slowly resuming and expected to fully come into place by mid-September, rates keep falling. The Capsize average time charter rate was USD 85,862 per day by the end of the week, down by USD 8,163. The average time charter rate has now lost a massive USD 148,126 since it hit an all time high of USD 233,988 per day on June 6th 2008.
The dry bulk markets have tumbled in all sectors as a lack of fresh inquires, particularly from China, have failed to absorb an excess of tonnage.
The drop in the global benchmark for the cost of shipping commodities such as iron ore and grains came amid a slowdown in global economic activity and a broad sell-off of commodities, conditions that, as was expected, had their direct impact in the chartering activity and as a result, on the index itself. FT reported that, quoting comments from Peter Norfolk, of London-based shipbrokers Simpson Spence and Young, who said the market was experiencing a ?real slowdown in chartering activity?.
Speaking to Hellenic Shipping News, Mr. George Grigoriadis, financial analyst for George Moundreas & Co. said that the fundamentals of the global economy are to be blamed for the drop in freight rates. ?We"ve been witnessing a drop in consumption activity and investment, with Eurostat also saying that the growth in investment activity throughout Europe has been curbed?, Mr. Grigoriadis said. He went on to state that demand for iron and steel from China has slowed down in the recent weeks, which will continue to add pressure to shipping rates, a trend not likely to change, at least for the following weeks. But Mr. Norfolk and others said they expected a rebound in freight costs later this year.
In the Forward Freight Agreements over-the-counter futures market, prices for December are above current spot quotes, suggesting charterers are expecting a rebound, although not back to the levels that were reached in May. James Leake, of Icap Shipping, said the recent fall in the Baltic Dry was not the end of a booming period for the sector. ?We forecast a rebound in freight costs from November onwards on higher imports to China and a seasonal bounce back in grain activity in the Atlantic basin,? he said.
Going forward, 2009 is expected to be a turning point for the market with many analysts predicting that a downward cycle of the booming sector, in terms of freight rates. This is attributed to the huge increase of tonnage expected with a series of new buildings gradually coming into the market, product of the unprecedented ordering activity made during 2006 and 2007. Mr. Grigoriadis said that in 2009, the increase of dry bulk tonnage is estimated to reach 9% - 10%, when the relevant rise on global trade isn"t expected to surpass a 4% - 5%, causing a huge gap between demand and supply. This in turn will be directly reflected in freight rates.
But even if the worst-case scenario comes true and freight rates plunge to even more significant depths, the market has ways of altering the situation. The most notable lies in the ageing fleet of dry bulkers, with hundreds of ships now being over 25 years old and staying in service, because they keep earning good money to their owners. Once this stops, it"s more than certain that a growing number of these vessels will be headed for demolition. Of course, the impact of this, won"t be felt right away in the market, but in the middle term, rates will start climbing back again, as the balance between supply and demand will gradually be reinstated.