As the World Economy Sinks, So Does Global Shipping
Take a stroll along your proverbial Main Street, and you may see signs of the global financial crisis moving into the real economy. You can also head straight to the nearest major port. There may be no more serious warning of the potential reach and depth — and duration — of the worldwide economic slowdown than the sinking fortunes of the shipping industry.
From reduction of traffic on key trade routes to the cancellation of new ship orders to plummeting cargo rates, transport-by-sea is a very real gauge of declining demand across the globe for raw materials and consumer products. With some 77 percent of worldwide trade arriving by sea, "shipping is the thermometer of globalization,"notes Professor Oliviero Baccelli, a transportation economist at Bocconi University in Milan. "It allows us to take the broadest view of the health of the worldwide economy." (Read "The QE2 Goes on the Block")
And from the docks of Rotterdam to Seattle to Shanghai, the troubling symptoms abound. The Baltic Dry Index, which measures world shipping charges for raw materials, has plummeted from a high of 11,793 in May to 672, dipping to its lowest levels since soon after the index was established in 1985. Daily rental rates for the largest Capesize category of carriers have plunged from $234,000 just two months ago to $2,320, a fall of a staggering 99 percent. Jeremy Penn, president of the London-based Baltic Exchange, cautions that bulk rates are prone to fluctuation, and have been hit particularly hard this time by the skittishness in financial markets as the necessary letters of credit for commodity purchases have grown harder to come by. Still, Penn says the recent drop in bulk cargo fees is unprecedented, citing declining worldwide demand, particularly as the economic slowdown reaches China. "The violence of the drop (in rates),"he says, "is more extreme than anything we've ever seen before."
Despite the fluctuations in spot purchase prices, Baccelli says the industry enjoys a certain stability through tough times thanks to the enduring presence of family-run behemoths and an ever higher concentration of control. "You have families who have hundreds of years of experience, who have lived through these situations and equipped themselves, and are resistant to speculation."
Even seasoned ship owners, however, are facing a storm unlike any they've seen before. Right now, the tangible signs of a lasting retrenchment are popping up in ports and along sea routes across the globe. The CKYH consortium of two of the largest Chinese and two South Korean shipping firms has just announced that six routes will see either a suspension of service or reduction in capacity. Service will be halted on the Mediterranean-Asia-America pendulum service early next year, while CKYH has already reduced its capacity from Asia to the U.S. East Coast by some 18 percent.
Perhaps even more worrisome for the long-term outlook is the rush to cancel orders of new ships. In November, New York-based Genco Shipping and Trading was willing to kiss goodbye to a $53 million deposit in order to get out of a half-billion dollar deal to buy six new vessels. Clarkson Plc, the world's largest shipbroker, announced that while 378 ships were ordered in Oct. 2007, only 37 were ordered in Oct. 2008. Big cancellations could set the stage a shortage of ships once the world economy recovers. But the market today is telling ship owners but one thing: glut.
Kriton Lendoudis, managing director of Athens-based Evalend Shipping company, says that in Greece there are some 100 applications by ship-owners to lay-up their vessels. Evalend, which specializes in medium-sized ships, has thus far avoided the worst, and still expects 200 million dollar profits for 2008, but Lendoudis concludes: "The next 24 months do not look very optimistic."
The free fall of shipping-charge prices and the mothballing of new vessels are not the only measures of the perfect storm of extra-tight credit and worldwide economic retrenchment that is now hitting land. Like oil industry investors who are said to count passing tankers to get early estimates of worldwide supply and demand, the shipping industry also looks for pieces of pure anecdotal evidence in places like the southwest tip of England. Just upstream on the River Faul from the port of Truro, harbor master Andy Brigden runs a service of mooring ships when they are put temporarily out of service. Over the past month, Brigden has had a sudden uptick of inquiries from shipping companies looking for long-term berth space. "It had been quiet here for many years, just a few seasonal moorings,"said Brigden, reached by telephone in his harbor office. "In my experience, this is the largest number of requests we've had in such a short time." Economists will continue to chart wild swings of stock markets and prices of raw materials. Folks on Main Street will be calculated in retail sales figures and unemployment rates. But as long as business is booming for harbor master Brigden, there will be little hope for recovery on the horizon.
— With reporting by Emmanouil Karatarakis / Athens and Michael Schuman / Hong Kong
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