Commodity shipping lines in trouble as Baltic Index tumbles

The world’s coal, grain and ore shippers, after the longest losing streak since 2005, may face another two years of declines as the fleet expands and slower global economic growth curbs demand for raw materials.

The Baltic Dry Index, the benchmark for shipping costs, fell for 23 consecutive sessions through Aug. 12, the worst decline since the third quarter of 2005.

The index will average 40 per cent less next year and sink another 47 per cent in 2010, according to Goldman Sachs Group Inc. STX Pan Ocean Co Ltd. and the other 11 smaller members of the Bloomberg Dry Ships Index have retreated as much as 34 per cent in three months.

“What we have is a classic cyclical downturn,” said Andreas Vergottis, research director at Tufton Oceanic Ltd, the world’s largest shipping hedge fund manager. “People are not buying cars and people are not buying houses, and when that stops, it travels backwards all the way back to the mine.”

Commodities, as measured by the Standard & Poor’s GSCI index of 24 raw materials, are in a bear market after plunging as much as 22 per cent from a record set July 3.

China, the world’s biggest consumer of coal, iron ore and industrial metals, expanded at the slowest pace since 2005 in the second quarter. Supertankers that ship oil are trading below the break-even rental rate of Frontline Ltd, the biggest owner of the ships.

The Baltic Dry Index reached a record 11,793 on May 20 and has dropped 40 per cent since then. The index will average 8,498 this year, 5,099 next year and 2,719 in 2010, according to Hong Kong-based Goldman Sachs analysts Tom Kim and Edman Wong.

Chinese Manufacturing
The index gained 1.5 per cent yesterday, spurring a 12 percent rise in shares of STX Pan Ocean today in Singapore. Golden Ocean Group Ltd. was 7 per cent higher by 11:44 am in Oslo and Norden advanced 6.6 per cent in Copenhagen.

Manufacturing in China contracted in July from June, the first drop in at least three years. Steel mills and other factories were closed to cut pollution during the Beijing Olympics that end Aug. 24. The world economy is “precariously close” to a recession in 2009, UBS AG said Aug. 6.

Slowing growth comes as shipyards have almost as many capesize vessels on order as already exist in the fleet, according to Goldman Sachs. Capesizes are the largest dry bulk vessels and too big to sail through the Panama Canal. Instead, they navigate Cape Horn or the Cape of Good Hope when delivering commodities from South America’s Atlantic coast to Asia.

To be sure, even after the 23-day decline in rates, shipping costs remain more than three times higher than their 20-year average of 2,015 on the Baltic Dry Index.