Baltic fall to 22-yr low may hit Indian shippers

Baltic Dry Index, the global benchmark for freight rates of dry bulk carriers, dropped to more than a 22-year-low, which may see even the existing long-term contracts of Indian shippers being renegotiated. Indian shippers earn at least 50 per cent of their revenue through long-term contracts.

The key index fell to 666, dropping 94.3 per cent in about six months, from its all-time high of 11,689 as the global economy slowed down. Steel producers have been cutting production as demand slumped. This has led even the world’s largest steel maker ArcelorMittal to breach contracts for shipping cargos.

Essar Shipping Chief Executive Officer A R Ramakrishnan said, “We are not going to be completely insulated of what is happening globally. Charterers will do whatever they can do to mitigate their losses.” He admitted that the existing contracts could be re-negotiated. The company has 26 ships with a total capacity of 1.6 million deadweight tonne and earns more than 70 per cent of its revenue from long-term contracts.

The ongoing financial crisis and the resultant drop in economic growth has adversely affected global trade, leading to a drop in demand for ships. The world output is expected to drop to 3 per cent in 2009 compared to an estimate of 3.9 per cent for 2008, according to an IMF projection. The global output grew by 5 per cent in 2007.

“No one has a crystal ball on how long freight rates for the dry bulk carriers would continue like this,” said S Hajara, chairman and managing director of the country’s largest shipper, The Shipping Corporation of India. “Many ships are unable to even convert the variable or the running cost at the current freight rates,” he added.

Demand for dry bulk ships from countries such as China and Brazil, which account for a large chunk of steel and coal trade, has shrunk. The global liquidity crunch has also made it difficult for traders to obtain letters of credit.

“The difference between the spot rate and long-term contract rates has reached an unusual high,” said Ramesh Singhal, chief executive officer, i-maritime, a Navi Mumbai-based shipping consultancy firm. “A renegotiation on the contracts is bound to happen,” he said.

Mercator Lines Executive Chairman H K Mittal said, “There is no fear for the breach of long-term contracts.” Mercator Lines is the country’s biggest private shipping company, having the largest fleet in the dry bulk segment.

Luxembourg-based steel maker ArcelorMittal has been dragged to court by Paris-based commodity trader Louis Dreyfus for breaching shipping contracts. The company had settled one case out of the court against its Brazilian unit on Wednesday, while the other case against the Belgian unit of the company is still unsettled.