Tags
Baltic Dry Index, dry bulk shipping, global economy, hipping companies, Iron ore shipping vessels, shipping industry
Dry bulk shipping industry’s negative performance is cause for alarm
One of the most watched commodities these days is the Baltic Dry Index. The Index has fallen by 90% since reaching a high in 2008, and in February 2015 we saw the worse performance in three decades.
In 2008, shipping vessels were earning around $200,000 daily. Today, shipping companies are earning less than half the total amount of their costs. Consider this: capesize rates equate to approximately $4,300 per day, while the daily operating costs are averaging at $6,500. Once all the additional operating costs are included, owners are spending $13,000 each day. Just four months into the year, eight shipping companies have filed for bankruptcy and under present circumstances, more could follow. The question is: why and will things turn around?
Slowing global economy
It is true that the overall global economy has been slow to recover, and some of the shipping industry’s strongest markets, such as China, have actually reversed direction, resulting in less demand for shipments. Many docks are already oversupplied with coal and iron ore, for instance, reducing demand.
Over-abundance of shipping vessels
However, the majority opinion of shipping industry analysts is that the true culprit is an enormous over-supply of shipping vessels. Favorable investment cash from Wall Street and others anxious to get in on the good fortunes of the shipping industry have been doling out roughly $5 billion to ship owners each year. The result has been a constant flurry of shipbuilding activity. The dry bulk shipping fleet has been increasing by an average of around 5% annually since 2009. At the same time, the quantity of commodities to be shipped is increasing by only 3-4% each year.
Even ship owners are alarmed at the rate of vessel construction and its negative drag on the fortunes of the entire industry. The CEO of Tsakos Energy Navigation, Nikolas Tsakos, implored investors, especially private equity funds, to curtail their huge investments in ship building, pointing out the dramatic negative effect that the oversupply of vessels is having on the health of the dry bulk shipping industry.
Is there hope?
There is room for hope, but it requires some tough choices and the jury is out as to whether shipping company owners have the fortitude and willingness to make the necessary sacrifices. Some reduction in fleet sizes is already happening on its own. To date in 2015, 4.6 million metric tons of Capesize vessels were sold for scrap, according to data from Clarkson Research Services. This represents an increase of 368% over last year’s demolition rates.
Angela Chao Blog 
Angela, thanks for these interesting posts. What do you think about the West Coast ports slowdown? Is that one reason there appear to be too many ships? Because they can’t unload? I have a paper on the problem coming out soon.
Diana Furchtgott-Roth
Senior Fellow and Director, Economics21
Manhattan Institute for Policy Research
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Wow – how interesting very best of luck! Unfortunately, I don’t think I will be much help here, though, because the west coast ports slowdown predominantly affects container ships, not dry bulk, so it is not a reason there are too many ships. The reason why there are too many ships is because shipyard capacity is too high, too many people ordered ships, and many private equity and hedge funds financed the ordering of too many ships.
Really fascinating information. I never realized the diverse ways in which the economic slowdown affected companies. With shipping being around for so long, I assumed it wasn’t an industry that would suffer any time soon.
I don’t believe that the decline is cause for too much concern. Every industry has a down turn as there are many factors at play that can affect things. People will need to adapt but there will always be demand for ships to transport goods.
So the way out of the slow down is to reduce the number of vessels in the fleet? I guess that makes a lot of sense.
Some sobering information, hopefully an optimistic solution will present itself.
What do they do with the coal and iron ore surplus in China?
Less than a year after your article, the BDI has hit the historic low. The surplus supply of new carriers has been a good explanation in 2015, but what about the current situation? Many analysist seem to think, that the global crisis is coming and the world trade is going to die. What do you think about this? Personally, I see rather a sign of economic recovery, than a near slump on the stock markets. Maybe You will find my article interesting: http://bargainvalue.co.uk/what-is-going-on-with-baltic-dry-index/
I try to prove the correlation between the BDI movements and the UK stock market. As you can see, the low level of this indicator can be a quite good sign for the market.
These are actually enormous ideas in regarding shipping. You have touched some nice factors here. Any way keep up writing.