The Baltic Exchange's dry freight index has now fallen 90 per cent from its recent peak at the end of May. It has beaten tough competition to claim the title of worst-performing financial or commodity market in 2008. Because ocean shipping plays a central role in an increasingly globalised economy, analysts often use freight rates as a proxy for world trade volumes, and by extension a leading indicator for the health of the manufacturing system and world economy. The dramatic slump in freight rates in less than five months has coincided with anecdotal reports of importers and exporters unable to secure trade credit from a crippled banking system, leaving goods unshipped by the quayside. Some commentators have concluded the trading system is seizing up and the world economy is on the brink of a deep and prolonged depression.
But before we rush to conclude the end is nigh, it is worth taking a closer look at the very specific dynamics of this market. The decline in freight rates to date has more to do with specific factors than a general slowdown in trade volumes.
In particular, clearing queues at the massive commodity export harbours in Brazil and Australia have returned millions of tonnes of bulk carrying-capacity to the market. Clearing queues rather than a sudden downturn in trade volumes provides the best explanation for plummeting rates.
It is of course highly likely the global expansion will slow, or even reverse, over the next 18 months as the financial crisis works its way through the real economy. But the impact on freight demand is mostly in the future and does not explain the collapse of freight rates this summer and early autumn.
First, it is worth noting the Baltic index reflects spot market transactions – "distressed" prices paid by charterers and ship owners who find themselves goods to move or vessels to hire out and no regular contract to move them.
The index reflects terms on only a few vessels each day that represent only a small volume of shipping.
Ocean-going ships are expensive to build and maintain, and usually financed with large quantities of debt. Owners therefore have a strong incentive to charter them out rather than have them standing idle for any length of time. Even a handful of ships on offer hunting cargoes are enough to depress quoted spot rates on particular routes, and week-to-week changes of 10-15 per cent have not been uncommon.
Gyrations in the spot market index overstate changing terms in the wider market, where most commodities are carried on longer contracts.
Second, it is worth noting the index peaked at 11,771 points in May and had already suffered a retracement of 52 per cent to 5,663 points on September 5. More than half the decline in the index thus occurred before the credit crisis intensified.
Freights had already halved when the Dow Jones was still above 11000, crude oil was well above $110 per barrel, and most commentators were still optimistic for continued growth in the advanced economies and emerging markets in the remainder of 2008 and throughout 2009. Credit problems and the prospect of a sharp slowdown in the economy are thus a very poor explanation for the decline.
Spot rates have actually peaked twice, in second half of 2007 and then again in first half of 2008.
The first spike occurred after the worst storm in 30 years hit Australia's massive coal loading terminal at Newcastle in June 2007, grounding the MV Pasha Bulker and closing the port for several days.
Freight rates have now returned to more typical levels after a period in which the market was unusually elevated.
Most analysts have been predicting a sharp fall in rates during 2009 and 2010 as shipyards in China, South Korea and Japan begin to deliver the record number of new vessels on their order books commissioned as a result of the recent boom.
The outlook over the next 12-24 months depends on how many of those orders are now cancelled because of the credit crisis and slowing economy, as much as global trade volumes.
But before we rush to conclude the end is nigh, it is worth taking a closer look at the very specific dynamics of this market. The decline in freight rates to date has more to do with specific factors than a general slowdown in trade volumes.
In particular, clearing queues at the massive commodity export harbours in Brazil and Australia have returned millions of tonnes of bulk carrying-capacity to the market. Clearing queues rather than a sudden downturn in trade volumes provides the best explanation for plummeting rates.
It is of course highly likely the global expansion will slow, or even reverse, over the next 18 months as the financial crisis works its way through the real economy. But the impact on freight demand is mostly in the future and does not explain the collapse of freight rates this summer and early autumn.
First, it is worth noting the Baltic index reflects spot market transactions – "distressed" prices paid by charterers and ship owners who find themselves goods to move or vessels to hire out and no regular contract to move them.
The index reflects terms on only a few vessels each day that represent only a small volume of shipping.
Ocean-going ships are expensive to build and maintain, and usually financed with large quantities of debt. Owners therefore have a strong incentive to charter them out rather than have them standing idle for any length of time. Even a handful of ships on offer hunting cargoes are enough to depress quoted spot rates on particular routes, and week-to-week changes of 10-15 per cent have not been uncommon.
Gyrations in the spot market index overstate changing terms in the wider market, where most commodities are carried on longer contracts.
Second, it is worth noting the index peaked at 11,771 points in May and had already suffered a retracement of 52 per cent to 5,663 points on September 5. More than half the decline in the index thus occurred before the credit crisis intensified.
Freights had already halved when the Dow Jones was still above 11000, crude oil was well above $110 per barrel, and most commentators were still optimistic for continued growth in the advanced economies and emerging markets in the remainder of 2008 and throughout 2009. Credit problems and the prospect of a sharp slowdown in the economy are thus a very poor explanation for the decline.
Spot rates have actually peaked twice, in second half of 2007 and then again in first half of 2008.
The first spike occurred after the worst storm in 30 years hit Australia's massive coal loading terminal at Newcastle in June 2007, grounding the MV Pasha Bulker and closing the port for several days.
Freight rates have now returned to more typical levels after a period in which the market was unusually elevated.
Most analysts have been predicting a sharp fall in rates during 2009 and 2010 as shipyards in China, South Korea and Japan begin to deliver the record number of new vessels on their order books commissioned as a result of the recent boom.
The outlook over the next 12-24 months depends on how many of those orders are now cancelled because of the credit crisis and slowing economy, as much as global trade volumes.