Friday, 19 June 2009

Green Shoots

Baltic Indices spurt, but is this a recovery?

Mumbai, June 6: The Baltic Dry Index (BDI) had hit a twenty five year low of 663 points in December last year; it hit 4,291 three days ago, six and a half times the December low.. A day earlier, on June 2, the Baltic Capesize Index rose by 18% to 7,724 points. Time charter rates for Capesize, Panamax, Supramax and Handymax vessels have spurted manifold since December. Stories are doing the rounds of container vessel layup’s decreasing. The question everybody is asking is, are these the fabled ‘green shoots’ of a trade recovery?

Not according to some analysts, who advise continued caution. For one, they say, the recent spike in time charter rates for Capesize and other vessels are attributed to abnormally high port congestion in China, which has tied up a massive number of vessels there. There are other reasons, in addition, why the industry is being circumspect.

One of these, Precious Shipping of Thailand, says that new tonnage entering the market will cause the BDI to decline. Saying that recent Chinese buying of iron ore will not be sustained, and pointing to speculators who may be driving present demand, it says in a widely reported statement, “Obviously, when you binge buy and compress imports of a single commodity, carried mainly by capesize ships, into a very short space in time, you tend to create two issues at the same time. Firstly, you tend to push up freight rates due to the time compressed/explosive demand growth for that ship sector. And more significantly, you create queues at loading and discharging ports, which tend to reduce availability of spot ships driving prices even higher. Combine this with delayed delivery schedules of dry bulk ships during Q4 08 and Q1 09 and you have the ingredients of a perfect storm especially when you take the number of capesize ships that have been sent to the scrap yard during the last 6/9 months."

Precious goes on to point out that this development will skew the supply/demand paradigm even further, causing a temporary halt in scrapping as well as a resumption of shipbuilding activity, which from all reports has been at a standstill this year. All these factors may well do long term damage to the industry, although there may be an immediate uptick in the BDI. “Clearly the BDI is more reflective of the Capes and the Panamaxes than of the market as a whole," the Company says. If Precious is right in its assessment, the crash may be as sharp as the spurt was.

Coincidentally, a Reuters report published in Forbes magazine quotes Dale Ploughman of Seanergy Maritime Holdings saying that although trade finance is, “Showing signs of life following traumatic upheavals during the height of the financial crisis in late 2008, smaller traders without an established track record in particular are still finding it hard to obtain credit. This is an issue the whole industry must deal with." It seems that the upheaval in credit lines that started with the collapse of Lehman Brothers in September 2008 is far from over, although there certainly seem to be some green shoots here. "We're no longer in the massive destabilising that we saw when trade credit was not available," Douglas Mavrinac, an analyst at Jefferies & Co, told Reuters. "The banking system is healing itself now. But there is still a long way to go and rates are still well off where they were."

Others are more sceptical, pointing out that fixing the trade credit issue in its entirety is essential now otherwise the problems will just be magnified when the market eventually recovers. The IMF says that the shortfall in trade finance (the gap between how much credit is needed and how much banks are willing to lend) was $500 billion in early 2009. No wonder the BDI fell as trade in some commodities was crippled. Incidentally, the IMF has also predicted a global decline of 6.1 percent in trade in 2009.

As if this were not confusing enough, some within the industry have questioned the accuracy of the Baltic Capesize index, raising concerns about its “seemingly erratic” movement. This same index spurted 18% within a day earlier this month. A number of members of the Baltic Exchange Freight Market Information Users’ Group have expressed concern reports Lloyd’s List.

The system at the Exchange is this: thirteen shipbroker ‘panellists’ give a confidential daily summary of capesize vessels to the Exchange; this information is used to compile the Capesize Index. Although the panellists are supposed to give information on fixtures they have participated in, it is felt that some are factoring in freight derivative contracts too. Mr Albertijn of the same User’s group wants more transparency in the functioning of the exchange, although he is hopeful of a good outcome of the dialogue between the user group and the Baltic.

The green shoots, even if they exist, seem quite tender right now. It may be a good idea not to rush in just yet.



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