The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
DK Matai - November 19, 2008
Dear Friends, freight shipping prices for transporting dry raw materials have collapsed in November 2008. The Great Unwind is like a Tsunami that is engulfing and halting the shipping world at an accelerating rate. The Baltic Dry Index sounds like a weather report, but what it really does is track the price of shipping bulk cargo -- such as coal, iron ore, cotton and grain.
Recently, the Baltic Dry Index has fallen through the floor. It has slumped by nearly 95% over the past five months. In real dollar terms, at the peak of the market in June, a 170,000-tonne Capesize bulk carrier cost USD 233,988 to rent. Recently, it was available for USD 4,793 - that is a crash of 98% and is below the cost of paying for crew, insurance, maintenance and lubricants. Why?
1. Of the USD 13.6 trillion of goods and materials traded worldwide per annum, 90% rely on letters of credit or related forms of financing and guarantees such as trade credit insurance. International shipping works on "letters of credit." These financial guarantees are issued to buyers of bulk cargo by their banks. This system has greased the wheels of global trade for the last 400 years by transferring payments internationally from buyer to seller once shipments have been delivered. With the collapse of the credit market - and banks now sitting on their hands, refusing to lend - the fast-moving wheels of global shipping have come close to halt.
2. There is a collapsing demand for credit driven expensive product purchases like cars and as a consequence, the transport of associated raw materials and sub-assemblies. Auto sales are falling in double digit percentages across most of the G7, ie, the US, Japan, Germany, UK, France, Italy and Canada. The pace of car sales growth is slowing down across most of the remaining G20 nations as well, including China and India.
This is a massive disruption in the freight market with asymmetric consequences for world trade, which poses systemic risk for many nation states. Liquidity has to return because if there is insufficient money to provide standard finance, world trade is being sharply cut back and economic growth is not only stalling but likely to implode. If cargo trade stops, a whole lot of supply chain disruptions start. For example, if the iron ore does not go to the refinery, there is no plate steel. If the plate steel does not get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers cannot buy. If the consumers cannot buy, there can be no sales!
On a more sobering note, if bulk shippers cannot buy cargoes, then a lot of US and world grain could end up rotting in warehouses while big portions of the world go hungry. For example, the Saudis are the biggest importers of food in the Middle East. They probably have the money to pay cash for their food shipments and may not therefore need letters of credit. But for the approximately 2.7 billion people in the world who spend 80% of their income on food, a disruption in the global shipping trade could mean the difference between quiet poverty and going hungry day-in, day-out. That will not last for long before there is social disorder on a massive scale.
The Baltic Exchange based in London is the world's leading maritime marketplace. Their dry index, a measure of shipping costs across different ship sizes, hit a record high of 11,793 points in May but has since fallen by 93% to 815 points last week. The UN Conference on Trade and Development (UNCTAD) has said that the financial crisis had begun to affect international trade, noting sharp falls to key shipping indices. Much lower shipping costs mean national markets are more contestable by foreigners, which should limit the ability of domestic firms to raise prices and therefore this should reduce the possibility of inflation. We can safely conclude that the majority of The Great Unwind's forces moving through the markets now seem to be deflationary, and not inflationary.
The ravaged worldwide demand for cargo ships is due to the chronic global financial crisis affecting credit availability, an unprecedented synchronised economic downturn across most of the major national economies in the world caused by massive demand destruction, and the resultant collapse in commodity prices. At the same time, container rates in the Asia-Europe routes have plummeted by around 75% this year and a price war between companies seems to be driving rates lower and lower, destroying the profitability of container shipping and placing huge stresses on companies struggling to meet their commitments. A significant component of the dramatic decline in shipping indices has been due to the difficulty in arranging trade finance during the credit crunch. Demand has been slashed because the global credit squeeze has made it very difficult for buyers to attract funding. At the same time, perceived counter-party risk in the physical markets has slowed trading to a trickle, exacerbating the freight slide. Many big players involved in the shipping of dry commodities and goods cargo are unwilling to trade with some parties fearful of their financial footing. There are big chains of owners of the chartered ships in the supply chain, so if someone goes bankrupt half way through the chain, it has a knock-on domino effect for everybody else. Another problem is that there are quite a significant number of players walking away from cargoes at present. So anyone who has taken cargoes to hedge the vessels they have chartered is now finding themselves with the ship without the cargo to carry.
ArcelorMittal, the world's biggest steelmaker, on November 5th said its global output will decline by more than 30 percent. Cia Vale do Rio Doce, the world's biggest iron-ore producer, said last month that it will cut production.The fall in demand for many raw materials, which began at the beginning of June, first squeezed 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. One could be forgiven for not noticing what the world has experienced in recent years by way of an unprecedented growth in shipping and shipbuilding, fuelled by cheap imports from Asia and the seemingly unstoppable rise of economies such as China and India with their insatiable demand for raw materials. For some time charter rates went through the roof and reached a zenith in May/June this year and demand for new ships out-stripped supply. A different picture is now emerging. Companies are starting to struggle with too many ships chasing ever decreasing rates.
This slump not only means a fall in revenues but also less revenues to service debts. In turn, the current 'credit crunch' means extreme difficulties for struggling shipping companies seeking to raise capital. UNCTAD revealed 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, even when they were losing their 10% deposit in tens of millions of dollars. Mitsui OSK Lines (MOL), Japan's largest bulk shipping company is said to be considering laying-up and even scrapping vessels as revenues collapse. MOL may mothball some of its largest vessels. The company is considering scrapping seven of its Capesize dry bulk ships from its fleet of a 100 vessels. This suggests that MOL may be getting ready for a protracted down turn lasting several years. Reports are already filtering through of companies seeking sheltered waters to lay up their giant vessels to weather the financial storm. Just as in the days following the oil crisis in 1973, we could see the same happening with the great lumbering bulkers and container vessels, which now seem less and less attractive as they ply the waters with their great bellies less than full. In the space of less than half a year we have seen the shipping world ride the crest of a massive globalisation expansionary wave and then plunge into a financial storm that could sweep most vessels off our oceans, and with them, companies who cannot weather the crisis caused by The Great Unwind.
[ENDS]
We welcome your thoughts, observations and views. Thank you.
With love and warm wishes to you and family
DK with family
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Posted by DK Matai at November 19, 2008 02:47 PM
Comments
1. Posted by
Richard Thomas ∞Φ
![[TypeKey Profile Page]](http://www.intentblog.com/nav-commenters.gif)
on
November 19, 2008 03:57 PM
I wrote this here in 07
"Localized production now seems to be the green way to go. The ego empire is collapsing"
"result in localization destroying centralized power and control"
"We also do not have long to start up domestic production capability and implement localization"
Mark My Words
2. Posted by
Richard Thomas ∞Φ
on
November 19, 2008 04:32 PM
Watch this "Bucks" county video
get it "bucks" county
all in good fun..
3. Posted by
Richard Thomas ∞Φ
on
November 19, 2008 04:36 PM
Did you all read the prophecies?
Click my name.
4. Posted by
Richard Thomas ∞Φ
on
November 19, 2008 04:49 PM
Dear DK,
I have been following these developments closely and agree with your points and completeness of your outline.
The shipping industry, the great bellwether of the global economy, is in a massive state of contraction and it is not likely to improve any time soon as the global economy shows no recovery insight. To make matters worse, the supply of new tankers from existing orders will continue to rise into 2009, while the supply of new dry bulk vessels is expected to peak in 2010. It seems that the flood of cash which washed over the world in the last 8 years has encouraged everyone to dig up their yard and drill for oil, mine for coal, gold and ore, and strip the forests to grow ethanol. The goal of course is not to enrich the lives of citizens around the world, but to consolidate power, extend military prowess and start a sovereign wealth fund.
Now the world has an overabundance of shipping capacity, metals capacity, oil production capacity, grain capacity, manufacturing capacity, and debts to service, and the hyper efficient financial system has no money in the bank for a rainy day when the returns turn negative. Everybody wants to be an exporter, but there is only one importer. Nature is now fixing the imbalance and all of the world’s risk managers can finally see that their endless forecasts of growth and demand were more “dot.com” than anything else. Apparently they never learned that the “and” in “Supply and Demand” is spelt P-R-I-C-E.
If the economic downturn does create the turmoil and threat to life that you suggest in your outlook, than it will stand as a test to the human spirit to reevaluate what is important in life….to invest money for self-enrichment, or to invest our spirits in the cause of human enrichment. Maybe nature is telling us that the chaos in the financial markets is needed to change the principals of self into selflessness.
My view than is that this chaos has been brought on by a few factors.
Self interest over the needs of society: When executives can justify millions of dollars in bonuses at a time when layoffs and losses are mounting, we have lost our shared moral purpose to use industry to advance the needs of society. Our society is at its best when the fruits of everyone’s labor can be harvested, when innovation is rewarded at all levels, and when captain looks out for his crew. These days the captain only stays on the sinking ship, not for the sake of the crew, but to negotiate the boat for scrap. Today’s financial mutiny will hopefully reestablish the team concept in business.
Leverage: Its amazing how reckless the use of investor money can be when it is cheap and plentiful. I can sympathize with money managers who were struggling to place the next billion, when they knew there was another billion coming each month behind that. There is no excuse, however, for taking risks that exceed the boundaries of proven historical norms. As the markets were flush with cash, complacency set in and unrealistic expectations become doctrine. No one ever believed or planned for the day when the global ATM would ever need to be restocked with cash. The motivation behind the excessive leverage was partly driven by the need to outperform the market, to have one’s own Hollywood star emblazoned on the who’s who pages of the Wall Street Journal. It is truly amazing how unattractive a 7 to 10% return on an investment can be (even considered to be a failure in some circles) especially when celebrity managers and their performance enhancing leverage pills are flexing 35% returns on the front page. What they don’t realize is that nature has a way of equalizing and balancing in the long term, and the steroid induced hyper returns achieved up to 2007 will soon be averaged back to the ordinary 7% returns of mortals by 2010.
Accountability: The use of SPVs and SIVs along with the rampant use of swaps and derivatives, while all seen as financially innovative products, were being used to skirt regulation, sidestep standard accounting practices, avoid margin calls, exaggerate profits, increase leverage, enlarge client fees, escape paying capital charges, whitewash risk, evade taxation, and occasionally hide losses. These are all noble and good causes, unless you are the investor.
In short, I guess feel glad that the banks never allowed ordinary guys like me to finance the purchase of the 72 homes in the next neighborhood with the guaranteed returns on my life insurance investments whose premiums are paid out of my future inheritance and which is collateralized by the rental income I get from the yacht that I use to check on the small Caribbean nation whose sovereign debt I have insured using swaps to eight different investors. I am sure the financial crisis would have been much worse than it is now.
5. Posted by
Luis A Rangel
on
November 19, 2008 04:57 PM
Dear DK, that was very informative.
When I was in my young twenties I did the computer “stuff” and managed exports for two sister companies. They didn't do any exports when I got there and in a year I had representatives set up in 17 countries and was exporting to them, and never once needed to leave the US. I would get those letters of credit of course which is what made the transactions possible.
I think it might be a mistake to scrap those ships and there is cargo, they could need to carry rock dust and sea weed, maybe even people if there needs to be migrations as a result of climate change. Of course for it to actually happen might be a stretch of the imagination, I don't know if we are capable of mustering the collective will to achieve such a thing.
Excerpt
"We need to distribute 106 billion tons of pulverized silicate rock per year to remove the 3.4 billion tons of excess carbon from the atmosphere each year. With a total global land area of about 33 billion acres (exclusive of Antarctica and Greenland) this would require adding a maximum average of about 3.2 tons of pulverized silicate rock per acre per year world wide. Obviously, adding pulverized silicate rock to desert areas would not be very effective because of the scarcity of precipitation and plant life in deserts. Therefore areas of rapid vegetation growth such as tropical rainforests would require higher application rates to maintain the annual 3.2 tons/acre average rate. Such a project of adding pulverized silicate rock to soils world wide at an average rate of about 3.2 tons/acre is feasible from an economic and a technical view point. For starters, pulverized silicate rock is available as a low cost byproduct of rock quarries world wide. In New Jersey, U.S.A., pulverized basalt (locally called stone dust or mill ends) costs about $10.00/ton delivered within about 50 miles of the basalt quarries. When this supply of rock quarry byproducts is used up, crushed stone can be pulverized at an incremental cost.
In reality, significantly less than 3.2 tons of pulverized silicate rock per acre of soil would be required to be added each year to halt the buildup of atmospheric CO2 because the weathering of the silicate minerals in the top soil releases trace elements which increase the productivity of tree and plant growth (Hamaker et al, 1982), sometimes by as much as a factor of four times. The increase of plant productivity would increase the storage of carbon in vegetation living above ground and in the underlying soils as well as increase the rate at which organic debris is deposited in ocean sediments. When factoring in the increased productivity of plant life, it can therefore be estimated that the average amount of pulverized silicate rock required world wide to halt the buildup of atmospheric CO2 is in the range of 0.8 to 3.2 tons per acre, assuming a halt to world wide deforestation. Increases in the value of agricultural crops and timber products resulting from adding pulverized silicate rock to soils would offset part of the cost of applying the pulverized silicate rock to the soils world wide. When other benefits of soil remineralization are factored in, such as saving dying forests, reducing world wide hunger and disease
6. Posted by
Richard Thomas ∞Φ
on
November 19, 2008 05:50 PM
averting disastrous climatic changes, and saving precious top soil, the cost of worldwide soil remineralization can be repaid many times over."
Click my name for more and acknowlegements and credits.
7. Posted by
Richard Thomas ∞Φ
on
November 19, 2008 05:53 PM
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(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)Recent Posts
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Recent Comments
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Richard Thomas ∞Φ commented on The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
averting disastrous climatic changes, and savin
-
Richard Thomas ∞Φ commented on The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
Dear DK, that was very informative.
Wh
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Luis A Rangel commented on The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
Dear DK,
I have been following these d
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Richard Thomas ∞Φ commented on The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
Did you all read the prophecies?
Click
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Richard Thomas ∞Φ commented on The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?
Watch this "Bucks" county video
get it
Dear DK,
What perfect timing.
Open Letter to Billionaires and Multi-millionaires
11/19/2008
Dear billionaires and multi-millionaires,
One will be erasing your vast fortunes in the near future. Now one realizes that some of you actually created value to generate your wealth, while the wealth of many others is ill gotten or derived from gambling, fear or disease. We all know that becoming very wealthy as a result of generating genuine value for your fellow man is an excellent thing to do. As such one does not want to punish or deprive those that were impeccable in the creation of their wealth.
It is probable that those of an evolved consciousness will have your attention in different places, than those of a less evolved consciousness and ignorant separatist intentions, also we expect you will be connected within the 6.6 degrees of separation to some individual connected to The Source at the 2nd degree, in other words you know someone that knows The Source. Those holders of the ill gotten wealth will be oblivious to what is going on but will be provided with the bare essentials in the aftermath.
One has conceived of a process which will allow those of you so connected to convert some of your holdings and retain a portion of your wealth piping it into the new system in advance of the actual migration and go live day which has not has not yet been set pending certain prerequisites coming into place. The whole operation is still contingent on management inability to overcome ego impediments and attachment to excessive wealth. This determination will be made by March 2009.
During the mass conversion there will be a $250,000 – $1,500,000 cap per entity which will be posted to the master cash account, all funds exceeding this cap will be rendered null and void, and posted to the master suspense account, all interest due will also become void. Exceptions will be made for certain corporate and business entities that meet the requirements and stipulations.
This pre-conversion will involve the preliminary funding of certain holistic joint ventures and enterprise that will provide the new foundations and economy.
CLICK MY NAME to continue reading on Commando