Just when consumers thought one of the main drivers of current material cost ” sea freight rates ” would be coming down as new shipping capacity came on stream, it looks as if the credit crunch has done for them what it has for the housing market, according to a Bloomberg report.
Small to medium sized shipyards and those new to the market are finding it increasingly difficult to find loans. Previously, owners could expect to pay 1% over Libor for 12-15 yrs and be able to borrow up to 85% of the value. Now rates are higher than the 1% premium, the terms are reduced to 10 years and borrowings to no more than 65% of the value. Consequently, only the larger lines and owners with deep pockets can afford to keep their orders firm. Shipbuilding grade steel has increased by 47% since the start of the year and the viability of some of the Chinese shipyards not yet built but who had taken orders for new vessels is in doubt. Brokers estimate between 10 and 30% of the 2561 new vessels on order will not be built. No surprises then that freight rates have already begun to increase again as the availability of space has decreased. Rates were expected to decline by 56% over the next three years but instead are at a five month high as far fewer vessels have been delivered.
The Baltic Dry Index has risen 58% this year and stock in the larger shipping lines is on the rise. No comfort on the horizon then for metal producers that reducing freight rates would ease the pain of high commodity prices.