Interesting article below - helps explain some of the challenge they must be having in selling a product that increases a shippers cost at the onset, at least.
April 12, 2012
World Shipping: Presaging Trade’s Ill-Fated Voyage?
By Peter G. Hall, Vice-President and Chief Economist
Worried that international trade is about to run aground? There’s one indicator that suggests we should be. Other leading indicators are actually moving upward, but the Baltic Dry Index – a measure of bulk shipping costs, and normally a bellwether of global trade – is in the abyss. Are we headed for yet another slowdown in global commerce, or has this predictor somehow lost its way?
For drama in recent indicators, the Baltic Index has few rivals. It spiked at close to 12,000 in mid-2008 then plunged to a level just below 700 before year-end. Over the next six months, it rose to 3,000 and then fluctuated around that level for the next year. Since then, the trend has been downward, in spite of the periodic ‘ups’ in international trade. Its woes are aptly illustrated by its recent 10-week ‘rally’, which lifted the barometer to a level just under 1000, well under a tenth of the previous peak.
World trade hasn’t been the greatest help. Flows softened in mid-2011, a result of crisis-related interruptions in supply chains and temporarily higher oil prices. A third-quarter rally was snuffed in the final three months of the year as Thai flooding re-interrupted critical Asian supply chains. Although significant, these downturns are largely temporary, and should not have a lasting impact on trade flows. There is indeed more recent evidence of a rebound in trade flows. European trade weakness, on the other hand, is likely to take longer to dissipate. So, is it the culprit in lower shipping costs?
Movements of cargo suggest not. If the cost of shipping has collapsed, prices for bulk cargoes sure haven’t. Commodity prices have remained firm, suggesting that the problem isn’t aggregate demand for shipping capacity. True, EDC Economics believes that commodity prices are overblown, pushed up by excess stranded liquidity. But data indicate that total bulk volume flows are rising at a 5-6% clip each year. If there’s no issue with basic demand, what’s the real problem?
The plot thickens. Turns out it’s not just bulk shipping. Tankers and container ships are in the same straits. The Harpex Index – the Baltic equivalent for container ships – follows the same roller-coaster pattern. It has been battered about by the same factors, but not enough to justify rock-bottom prices.
The problem? As it happens, there are simply too many ships in service, and more keep rolling out of shipyards. Demand may be rising at a decent clip, but last year ship capacity rose 13%, and this year experts expect another 12% will be added to the global fleet. RS Platou sees falling trend utilization rates for bulk, container and tanker fleets, from levels of utilization already deep into recession territory across all types. Competition between carriers has driven prices below break-even thresholds, and in rare cases, shippers are actually paying for the privilege of getting a cargo.
How did it come to this? In the mid- to late-2000’s, shipping capacity was so consistently tight that orders for new ships took off. Bulk carrier orders increased almost tenfold, containers were up six-fold and for tankers, a three-fold increase in orders. In each case orders have come down sharply from the peak, but still remain unusually high. At this rate, it will be a long time before trade catches up.
The bottom line? Instead of presaging a tumble in global trade, collapsed shipping costs may be just the boost that Canadian and global traders – already on course for recovery – need most.
This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.
