Global ship glut fueling Baltic Dry Index plunge

The warning signs being flashed by the collapsing Baltic Dry Index (BDI), a leading global economic indicator, may reflect the folly of misguided expectations during the prior global economic boom, according to Hong Kong-based shipping analysts.
New super-sized ships ordered up during the era of cheap credit and surging global trade could explain the index’s 57% plunge in the last three weeks, according to Macquarie Research, which described this month’s BDI drop as “relentless” and “extreme.”
The BDI, which tracks worldwide shipping rates for dry-bulk cargoes in four vessel classes, is now touching lows last seen in early 2009, when global trade was just recovering from the financial shock waves of the Lehman Bros. collapse.
Shipping rates for Capesize vessels, a class that includes some of the world’s biggest ships, are down 76% this so far this year.
Macquarie analysts said Thursday the slump in the broader dry-bulk index represents “too much capacity in the face of more modest growth of trade volumes.”
Shipping companies appear to have jinxed their own industry by ordering up too many grand ships when conditions looked very favorable before 2008.
Meanwhile, further new capacity, equivalent to 22.7% of the existing fleet, is due to be delivered this year, according to Macquarie calculations.
“It’s hard to see much relief, even assuming slippage in the order book [deliveries],” said Macquarie analysts.
In a recent outlook report, Credit Suisse said the sector fundamentals may come into better balance in 2013, when new capacity is due to decline to 8.6% of existing fleet size. The turnaround would depend upon “significantly stronger” demand, the analysts said, even as they cautioned against expectations of a recovery along lines similar to 2009, when global fiscal-stimulus efforts were in full swing.
“With the global economy and China slowing down, we do not expect a repeat of 2009 to 2010,” the analysts said.
The Globe and Mail newspaper cited Export Development Canada’s chief economist Peter Hall as saying earlier this week commodity shipments were likely weaker in the second half of 2011 owing to factors that include the Japanese earthquake and tsunami, social unrest in the Arab world and slower economic growth in China.
In spite of the slump, Macquarie said it may be time to look ahead to a recovery in dry bulk carriers, naming China Shipping Development Co. and Pacific Basin Shipping Ltd. as favored selections.
Macquarie said both companies are likely to report profits for 2011 and 2012, while other shippers were likely to suffer losses in the first half of this year and possibly beyond.
However, other analysts warned there could be knock-on effects if the supply glut results in a financial storm throughout the shipping industry.
Business Insider quoted Basil Karatzas, the chief executive of Karatzas Marine Advisors, as saying European banks could face nearly $100 billion in losses to restructure the $500 billion in shipping loans on their books.
Signs of trouble emerged last year, with operators of both bulk and container vessels subjected to brokerage downgrades on concerns of glutted supply.
Source: Market Watch