As the Baltic Dry Index (BDI) continues to crash to new record lows, an influx of ships are being parked at ports around the globe, thus threatening global trade in a crisis “worse than in 2008”.
The global shipping index and industry has come under tremendous pressure as the price of oil continues to crash amid a global glut and as global growth eases led by a slowdown in China.
The BDI, which tracks global rates for ships carrying dry bulk commodities, ended flat on Thursday at a record low after falling for 12 straight sessions amid gloom over global demand.
If you are not familiar with the Baltic Dry Index, here is a helpful definition from Wikipedia:
The Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”
The BDI is one of the key indicators, if not the leading indicator, that experts look at when assessing the “real” health of the global economy and where it is heading.
— EMerging Equity (@EMequity) November 20, 2015
To put the global shipping crisis into context, the BDI has plunged around 98 percent from its peak in May 2008, according to Reuters.
The Baltic dry index is down about 98 percent from its peak of 11,793 points in May 2008, marking the lowest level since the records began in 1985.
Simply put, as Zero Hedge recently highlighted, nothing is moving as commerce is grinding to a halt.
A quick glace at a real-time shipping map on MarineTraffic.com gives you a better idea of the grave situation.
Another real-time shipping map on VesselFinder.com also appears to confirm the same.
Indeed, it appears that global shipping is coming to a standstill.
As global shipping firms are losing money at sea, more and more owners of ships and offshore oil rigs are increasingly finding places to park their vessels.
When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity.
According to the firm, the demand to park these unneeded vessels is “huge“, and requests are not coming in to lay up just one ship — but to park 15 or 20 ships.
There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.”
And as more ships are unused and being parked, orders for new ships have plunged.
Globally, orders for new vessels dropped 40 percent in 2015 and the demolition rate jumped 15 percent, according to consulting firm Clarksons Research.
In China, the world’s leading producer of ships, the damage has been severe as new orders for Chinese shipbuilders tumbled nearly 50 percent in 2015, as Bloomberg reports:
The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.
The slowdown has been felt at Chinese ports as sales fall.
The slowdown is hurting many Chinese ports. Sales at Shanghai International Port were 7.5 billion yuan ($1.1 billion) in the third quarter, down from 7.6 billion yuan the year before, and net profit was 1.4 billion yuan, a decline of 18 percent. The Shanghai Shipping Exchange’s containerized freight index has dropped 27 percent since the start of 2015.
As the global shipping crisis accelerates, the world’s largest container shipping firm has sounded the alarm on the current dire situation.
Maersk, the Danish shipping-to-oil conglomerate whose huge container ships can be seen from many a shoreline, warns that global trade is now worse than during the 2008 crisis.
The Danish firm has been hit hard by the slump in oil prices and container freight rates in what its CEO described as a “massive deterioration” in its business.
Nils Andersen, the CEO of the firm told the Financial Times:
“It is worse than in 2008. The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower. The external conditions are much worse but we are better prepared.”
As if 2015 wasn’t bad, Maersk, a bellwether for global trade, is warning that its profits in 2016 would be “significantly below” that of 2015.
Its underlying profit for 2015 was $3.1bn, down from $4.5bn a year earlier, and the Danish group warned this year’s result would be “significantly below” that. Maersk Oil will make a loss this year as its break-even price for oil is $45-$55 per barrel, compared with the current price of Brent crude of $31. Maersk Line, its container shipping business, will post an underlying result significantly below last year’s $1.3bn.
The global shipping crisis may deepen as a wave of bankruptcies could be on the horizon as owners find themselves unable to secure financial backing due to banks pulling back on uncertain loans, warns the CEO of Precious Shipping Public Company Limited (PSL).
“Do not be surprised to see more bankruptcies and action brought on by the lending banks on borrowers who have failed to show performance in terms of raising additional funds to bolster their liquidity to at least partially service their debt since their shipping revenues are probably not going to be able to do that this year,” said Khalid Hashim, CEO of PSL.
“Most dry bulk shipping companies, especially the smaller and non-listed ones, will simply give up as they will not be able to manage against such overwhelming odds,” he adds.
— EM Equity (@EM_Equity) February 7, 2016
So what lies ahead for global shipping and the global economy?
With a major indicator such as the BDI at a record low, at a level far worse than we saw during the 2008-2009 financial crisis, and with a number of other indicators at alarming levels, the global economy and financial markets are at a crossroads, and the road ahead over the next year or so certainly appears gloomy.
The best advice is I can give is to be prepared for the worst.