Baltic Dry Index Falls Another 10.7%, Down Nearly 86% From May

The collapse in the Baltic Dry Index continues. As we have noted before, the inability of cargo shippers to secure letters of credit (and the unwillingness of banks to accept L/Cs from other banks) is play a significant role in the plunge in trade transport. From the Financial Times:

The cost of shipping bulk commodities such as iron ore, coal or grains yesterday tumbled to its lowest level in almost six years as recession fears intensified and the difficulty of obtaining trade finance left many ships without any cargo.

The Baltic Dry Index, a benchmark for global freight costs, plunged 10.7 per cent on the day, to 1,615 points, its lowest level since February 2003. The index has fallen 49.8 per cent since the end of September amid weakening demand.

Steve Rodley, director of the London-based shipping hedge fund Global Maritime Investments, said some vessels were anchoring, waiting for better times, while some shipping companies were thinking about scrapping their older vessels.

“The whole shipping market has crashed,” Mr Rodley said. “But the biggest ships are suffering particularly,” he added.

The average daily cost for the largest dry bulk vessels – known as Capesize and used mostly to ship iron ore from Brazil and Australia to China – yesterday sunk 28.9 per cent, its largest daily fall in a decade, to just $13,070 a day.

The rate has collapsed 94.4 per cent since it hit an all-time high of $233,988 a day in early June.

The slowdown in Chinese commodities demand was confirmed yesterday by Tom Albanese, Rio Tinto’s chief executive.

“In the near term, the Chinese economy is pausing for breath. China is not ­completely insulated from an OECD recession and we will see an impact on Chinese exports,” he said.

The index’s latest fall follows several weeks when the short-term spot market on which the index is based has seen very little activity because of the current difficulty in arranging letters of credit, a key trade finance instrument.

Peter Norfolk, director of research and consultancy at London-based Simpson, Spence and Young shipbrokers, said: “You face continued freezing of activity because of the problems with credit in particular.”

Although it is traditionally regarded as one of the safest forms of financial activity, rates for trade credit have risen sharply in recent months as banks have withdrawn facilities to bolster their own liquidity.

Shipowners are suffering from banks’ reluctance to issue letters of credit, normally straightforward instruments used to assure a shipper of payment for a cargo after it is loaded on to a ship, but before the buyer receives it.

There was also a continued stand-off between Brazilian iron ore producers seeking to raise prices and Chinese steel mills now cutting production and using up stockpiles in retaliation.

A Bloomberg story yesterday provided further evidence that scarce credit was hurting shipping:

Pacific Basin Shipping Ltd., Hong Kong’s biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

“Letters of credit and the credit lines for trade currently are frozen,” Khalid Hashim, managing director of Precious Shipping, Thailand’s second-largest shipping company, said in Singapore yesterday. “Nothing is moving because the trader doesn’t want to take the risk of putting cargo on the boat and finding that nobody can pay.”

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a “big issue” for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin.

The Financial Times reported that US farmers are having trouble shipping grain:

Concerns about how the US financial crisis is affecting agriculture is one issue playing on voters’ minds in corn-belt Indiana, where economic concerns have turned this normally dependable Republican-voting state into an electoral battleground…

As the commodity boom pushed grain prices up to record levels this year, US agriculture enjoyed the benefits, but grain prices have tumbled in recent months along with stock markets, leaving many farmers grumbling that they are being squeezed between higher costs and lower revenues.

Echoing Mr [Indiana farmer Don] Villock’s concerns about emerging markets, analysts report that vessels loaded with US grain are sitting at buyers’ ports waiting to unload because importers are unable to obtain letters of credit to pay for the loads they carry.