More bad news for ocean trade

Baltic Dry Index plunges to new low; there could be a strong aversion to long-term deals

A fresh plunge on the main global index of the cost of moving major raw materials by sea has potential implications for trade.

The Baltic Dry Index (BDI) slid to a level of 402 on Wednesday, a new low, and this might stop much of trade across the Indian Ocean and Asia-Pacific market, say observers. There could be a strong aversion, for instance, to long-term deals.

The BDI is an economic indicator issued daily by the London-based Baltic Exchange.

“The trade climate is full of insecurity, as charterers are not sure if the price at which they have negotiated is the right low price,” Kiran Kamat, owner of Link Shipping & Management Systems, a leading chartering and shipping company, told Business Standard. “Charterers are unable to take a call, leading to last-minute back out (from deals), even if ship-owners are being flexible.”

The index began falling from early August last year, when China initiated a devaluing of its currency. From a high of 1,222, it has lost two-thirds in five months. Wednesday’s level is a three-decade low; the all-time high of 11,793 was on May 20, 2008. Since then, the index has been volatile, being down for much longer than thought likely.

A charterer might own cargo and employ a broker to find a ship to deliver for a certain price, the freight rate. A charterer might also be a party without a cargo, taking a vessel for a specified period from the owner and then trading the ship to carry cargoes above the hire rate.

“There have been very few inquiries and even of those, most were not firm. Of (every) five inquiries, three have failed,” said a ship owner, on condition of anonymity. “The charterers are fixing rates and then trying to trade the cargo. Freight is low enough but still charterers are not able to sell the cargo.”

The BDI measures a change in transportation cost of raw materials such as metals, ore, coal, grain and fertiliser by sea. The continuous fall since August followed China’s economic data, which set a strong bearish tone for the bulk trade market across the globe. For, China is the world’s largest importer and exporter of several commodities. A slowing in its economy now indicates a grimmer trade climate.

“Interest in fixing freight contracts for a longer period is absolutely absent from the charterers’ side,” said someone from a steel company. “No charterer wants to lock-in freight at a premium to the spot price, as they see little upside over this year. Ship owners might have to consider laying off some of their vessels to stem the slipping freight rates.”

On the India-specific trade scenario, sectoral officials said with coal supply higher in the domestic market, the iron ore export market completely out of the picture due to a long-period ban, and a diminished fertiliser trade, small-size Supramax and large-size Capesize vessels are idle, pushing even the ancillary industries out of a job. The latter caters to Capesize vessels, as these ships need constant maintenance.

“Shipping is a gamble and one cannot say when things will look up. It's all about being optimistic in the business,” say officials in the sector.