Why the Collapse in the Baltic Dry Index?

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The floods in Queensland, Australia, are taking more than a human toll, tragic as that is.

Consumers in Asia will have to pay higher prices for coking coal as the floods could remove some 14 million tons of coking coal from world markets out of a forecast annual seaborne volume of 259 million tons in 2011 some 5 percent of global supply, a Reuters article reports. More than half the world’s metallurgical coal exports come from Australia and roughly 90 percent of that comes from Queensland, mostly the Bowen Basin.

No surprises, then, that many ships are lying offshore from the Queensland coast, unable to load cargoes and with little prospect of an early resumption of business. But Queensland is not the only source of bulk commodities to suffer from adverse weather conditions, according to Guy Campbell, head of dry bulk at Clarkson Shipbrokers, quoted in another article. Weather-related disruption to shipping on Canada’s St. Lawrence Seaway is hampering iron ore shipments and a month’s rains in Brazil fell in one day this week, causing 250 deaths that hardly hit the headlines, but is equally causing chaos. It would be too simplistic, though, to blame the weather, varied and dramatic as recent events have been, as the sole reason for the collapse of the capesize vessel Baltic Dry Index.

Source: Reuters

As this graph from Reuters shows, from a peak in October of 2,784, the index has dropped to a 21-month low of 1,453, last seen in January 2009 when global freight momentarily froze as trade finance dried up in the wake of the financial crisis. Capesize vessels typically haul 150,000 cargoes of dry goods like coal, iron ore and grains. Duncan Dunn, a senior director with SSY Futures, said around 200 new capesize vessels joined a global fleet of around 1,000 last year. An additional 200 were expected to arrive this year, he said, while London-based Simpson, Spence & Young shipbrokers put the figure even higher at 241 new vessels due. The reality is there are too many capesize vessels coming onto the market in too short a time frame and the demand is not there for that volume of shipping space. Consequently, rates have plummeted well below operating costs. Including the cost of finance, most capesize vessels incur operating costs of at least $15,000/day; rates have dropped from US $46,284/day in October, to $10,285/day today, forcing ship-owners to start laying up vessels.

Perversely, smaller panamax-size vessels, which usually transport 60,000-70,000 ton cargoes, are earning a premium, currently in the region of US $15,742/day, as the smaller vessels are considered more flexible, but one has to ask — will it last? Falling freight rates will not in themselves negate the rise in commodity prices such as coking coal, but it will go some way to mitigating increases. The drop in demand will not be helped in the year ahead by Vale’s move into the shipping market with the introduction of the first of many capesize vessels in their new fleet. When you look at the ferocious cyclicality of the freight market, you have to ask, who would want to be a ship-owner? Only those with deep pockets is the answer!

Join us for a free webinar on steel price trends and outlook for 2011 along with guest speaker Metalwest, where we’ll discuss how OEMs can improve profitability through lean metal supplier programs.

–Stuart Burns

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