Abstract
The global shipping industry faced a watershed in 2008. After a number of
years of apparently unstoppable globalisation and double digit-growth in world
trade, there had been talk of a shipping ' supercycle' , seen as a long, almost
self-sustaining boom. 2008 however was the year in which the boom cracked,
leaving the industry to wonder whether from 2009 onwards it would experience
the relatively manageable pain of a conventional downturn, or more worryingly,
a harder, sharper, longer and altogether more miserable recession: a kind of
' super down-cycle' . It has to be said that as we go into early 2009, faced by
those two options, BMI' s view is that the latter, and not the former is the
most likely.
A key starting point is to look at the dramatic story told by the Baltic Dry
Index (BDI). As the name suggests, the BDI reflects the freight cost to
transport dry bulk cargoes around the world, mainly raw materials such as iron
ore, coal, and grains. The index excludes wet cargoes (such as crude oil
carried by tankers) and container business (used mainly to carry manufactured
products).
This has led some analysts to describe it as one of the ' purest leading
indicators of global economic activity' . Two main features of the index lead
them to this conclusion. One is that the commodities being carried are
' precursors' to the production process, meaning buyers order them on the basis
of their expectations for future demand for the finished products. Second,
with only buyers and sellers of shipping capacity represented on the Baltic
Exchange there is a perception that the index tends to minimise short-term
speculative influences (in fact, like in all markets, expectations continue to
play an important part in price formation).
As might be expected, the BDI grew strongly as the globalisation process
pushed ahead and the new powerhouse economies like China and India demanded
increasing volumes of iron ore, coal, and grain imports.
After reaching a cyclical low of 2,037 at the beginning of 2006, the BDI
initiated a powerful and virtually uninterrupted two-year climb, running up to
4,494 by the end of 2006 (a gain of 121%) and surging onwards and upwards
through 2007, reaching a peak 11,039 in mid-November, before easing off and
ending the second year at 9,392 (a gain of 109%). This level of growth was
based on a vigorous world economy and doubledigit expansion of international
trade volumes. It is also now apparent that, on a wave of apparently
unstoppable optimism, ship-owners piled up massive orders for the construction
of new ships, mainly in Chinese, Japanese and South Korean shipyards. It
seemed that the main danger on owners' minds was the fear of being caught
without enough shipping capacity to respond to the ever-increasing demand for
freight along key trading routes, such as Asia-Europe or the trans-Pacific.
But 2008 saw the boom stutter at first, a pause from which it recovered
strongly but briefly, after which, in the second half of the year, it
collapsed far more sharply and dramatically than anyone had expected. The BDI
started the year by continuing to display the weakness it had shown in late
2007, trending down until the end of January, before recovering what seemed
like its old vigour. From the beginning of February the index surged strongly
again over the next four months, reaching an all-time high of 11,771 by late
May. From that point onwards, however, it began a steady and relentless plunge
that was to dominate the rest of the year. From 11,440 at the end of May, it
weakened steadily to 9,589 at the end of June, 8,341 at the end of July, 6,929
at the end of August, 3,504 at the end of September, and 885 at the end of
October. So while the global financial panic made headlines in October - with
the collapse of Lehman Brothers and other institutions generating shock waves
that began to ripple through the financial systems of both the developed and
emerging economies - it can be argued that the BDI anticipated the global
economic turning point by a full five months, having turned clearly negative
in May.
By the first week of December 2008 the BDI index had fallen to 666,
representing no less than a 93% fall on the 10,142 level achieved in the same
week a year earlier in December 2007. It was also a 22-year low. While the
shipping industry remains segmented, the sheer scale of the downturn
spearheaded by the dry bulk segment has affected all sectors. In the second
quarter the big shipping lines were charging around US$2,000 per box to ship a
container from Asia to Europe; by the fourth quarter that had collapsed to
only US$500, a drop of 75%. In that six-month period the cost of chartering a
ship capable of carrying 2,500TEUs (twenty square-foot equivalent units, the
standard container size) dropped from US$30,000 a day down to US$12,000 a day.
Panamax dry bulk freighter charting rates dropped from US$64,000 in June to
around US$11,000 by year-end (down by 83%). ' Ocean freights between Shanghai
and Rotterdam have gone down by two-thirds and I think this will continue'
said Peter Nevhagen from freight management company Geodis Wilson.
In a word, the bottom dropped out of the world shipping market, with the
exception of the tanker segment, which has proven a little more resilient. The
sheer scale of the collapse has left many industry stalwarts somewhat shocked.
' The negative conditions we are seeing in the market place are unprecedented
in our industry' s history' commented Ron Widdows, chief executive of
Singapore-based shipping giant Neptune Orient Lines (NOL).
It is widely recognised that not all shipping lines will survive the downturn
and a shakeout and restructuring of the industry is beginning to get underway.
Claus-Peter Offen, a major German container ship-owner, has said he expects at
least a handful of companies to drop out of the market. He is predicting that
it could take two to three years before shipping markets stabilise and return
to normality. Beyond that time horizon however, he remains optimistic, arguing
that shipping handles over 90% of intercontinental trade and the globalisation
will not go into reverse. Dagfinn Lunde of DVB Bank told a recent London
shipping conference that the combination of excess capacity and the global
credit crisis had brought the shipping downturn forward. ' We have recently
been in a supercycle so it is difficult to predict how long the downturn will
last' he said, adding that ' we expect the depression in shipping will be
severe and long comparable with previous downturns and we will see many
company casualties in the coming months.
Cash flow can disappear very quickly and we are already seeing some companies
in distress' . A somewhat more optimistic view was taken by Michael Behrendt,
chief executive of German shipping line Hapag-Lloyd, who said he was looking
for an improvement to make itself felt in the third quarter of 2009. ' The boom
is over, world trade is not growing as strongly any more, but it is still
increasing' , he said, adding that ' shipping has endured lots of crises in
recent decades. In the medium of long term there will be, no doubt, a positive
development since globalisation is still with us' . Behrendt added that even in
a downturn people would still consume goods, which might be cheaper, but which
would still need to be transported.
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