Wednesday, November 19, 2008

World freight prices collapse amid financial crisis

World freight prices collapse amid financial crisis(November 19th)

LONDON (AFP) — Freight shipping prices for transporting dry raw materials collapsed in November, slammed by the global financial crisis, slowing economic growth and falling commodity prices, industry experts said.

Commentary: This is what they are saying however is it really the financial crisis which is to blame?

The Baltic Dry Index, an indicator of economic trends which tracks the cost of moving goods such as coal, iron ore and grain across the oceans, has slumped over the past five months.

Commentary: I am certain demand at this time would be higher for many commodities at current throw-away prices. However they are not being shipped.

The index hit a record high of 11,793 points in May but has since fallen back to earth, hitting just 815 points last week -- the lowest level since the end of 1999.

Commentary: This followed the speculator fueled price hikes on commodities and the subsequent abandonment of these markets for US Treasury Bonds, gold certificates and any where else cash could be multiplied more securely.

"The freight market has borne the brunt of both the financial sector crisis and the ensuing economic downturn," said analysts at British-based emerging markets bank Standard Chartered.

"Anecdotal reports suggest a significant part of this has been due to difficulty in arranging trade finance as a result of the credit crunch rather than lack of demand," they said

Commentary: Why are these reports merely anecdotal? Do not commercial trade banks keep a record of credit references, requests and denials?

"Demand for commodities has also undeniably slowed, particularly for iron ore into China, which has an overwhelming impact on the dry freight market."

Commentary: If this is true then why are the Chinese readily able and actually willingly gobbling up parts of commodities producers in Australia for example?

Meanwhile, the Baltic Panamax Index, comprising of seven dry bulk routes, nosedived to 662 points last week -- the lowest level since its creation in 1998 and compared with a record high 11,425 points five months ago.

Commentary: Is there any evidence to suggest shippers are finding/have found more economical routes other than these to deliver their essential goods? For example, are bulk goods carriers suddenly back in favour? Are a number of charter businesses suddenly taking over the shipping routes off the books? For example have many shippers exporters and importers simply returned to standard bulk carriers on tramp routes to save cash? Would this have been one of the global trading world's ways of escaping commodities priced dry bulk shipping costs in the last couple of years?

Georgi Slavov, head of dry freight research at ICAP Shipping in London, said freight prices sank because steelmaking companies, hit by falling prices, have sought to slash their transportation costs.

"The first trigger for the collapse of dry bulk freight rates was the sharp sell-off across the commodity sector, the most important for the short-term freight market being the steel price," Slavov told AFP.

"The fall, which began at the beginning of June, squeezed first the profit margins of producers since they faced fixed high raw material costs and falling prices for their finished products.

"This was followed shortly by a squeeze of freight (costs) as they tried to pass the pressure from the profit margins to the freight market."

Commentary: It appears the freight markets are unwilling to swallow producer-based losses and neither are importers willing to purchase over-priced goods. It therefore appears the producers of commodities may have simply exceeded their own supply costs by 50% on many stockpiles of commodities which remain unsold.

Meanwhile, the chronic global financial crisis and slowing economic growth have ravaged demand for cargo ships.

Sverre Svenning, director of Fearnley Consultants shipbrokers, said demand has been slashed because the global credit squeeze made it very difficult for buyers to attract funding.

"The buyers don't get credit, so they can't buy the commodity ... (and) they don't need any ships," Svenning said. "It's definitely a reflection of the crisis affecting the real economy."

Commentary: Indeed however with the heavily unionized clout of commodities suppliers in North America why is the only issue in the public eye US automakers bailouts? How many commodities producers will need similar loss compensations packages due to the fact that up to three months of leveraged credit orders and inventory have been cancelled all processed at up to 50% higher costs than at present?

The UN Conference on Trade and Development (UNCTAD) said earlier this month that the financial crisis had begun to affect international trade, noting sharp falls to key shipping indices.

Commentary: Surely more than a few shippers had found alternate routes to delivery of over-the-top commodities in the last two years of record rising bulk rate costs?

The UN agency said in its annual maritime transport review that the world's merchant fleet had expanded to a record 1.12 billion deadweight tons, with the order book for new vessels reaching a peak of 10,053 ships in 2008.

However, from mid-2008, companies were cancelling new ships on order.

Commentary: How many companies would bee defaulting on orders not based on commodities prices alone but on currency exchange pegged futures? How many orders would also be cancelled because the builders were losing as well?

Svenning said "it's a lack of demand. Lots of people are stuck with high (commodity) inventories with high costs and they are simply sitting tight at doing nothing right now.

Commentary: I cannot resist.

"So there has been an imbalance between supply of transportation capacity and demand for this transportation capacity."

Looking ahead, Standard Chartered analysts predicted that freight prices could rebound in the coming months.

"As inventories are run down over the next few months, particularly in the steel industry, a rebound in freight will become more possible," they said.

Commentary: How many bankruptcies will ensue between then and now offering the only opportunities to unload inventories at throw-away or even currrent prices?

"Growing reports of cancelled orders for new vessels increase the risk of extreme upward pressure on freight rates once more as the global economy begins to recover from this cyclical downturn in 2010."

Commentary: Whoa, who decided this was all ending in 2010? Are we playing optimist now?

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