It has been awhile since the Baltic Dry Index (BDI) featured here. May 22, in fact, when some scepticism was shown at a Marketwatch.com headline “Shipping Index underlines global resilience”.

The argument then was that supply constraints, not demand, were priming record prices. Of course, it is true that shipyards had been building up the order book for years. But port infrastructure lagged significantly. While spanking new shipyards in China were on track to double ship capacity by 2010 existing vessels were waiting 3 weeks to be loaded in Australia and Brazil. Still, the ‘Supercycle’ thesis (alongside that of ‘decoupling’) was ever present holding it all up and keeping everyone happy.

And then, in 7 autumnal weeks, the violins went from Vivaldi to a composition by your 2-year-old non-prodigy. The BDI slipped under 6,000 right down to 925. Suddenly, unpleasant thoughts dawned: the US consumer, 20% of global consumption, might start to save; construction projects are being shelved the world over; and China will not be able to offset its falling exports by stoking domestic demand. Notably, the forward freight agreement market captured little inkling of this collapse.

Oops.

So gone are the heady summer days when buyers would pay the same price for a 7 year old capesize ship as they would for a new one of similar tonnage. Gone are the amazing shipping IPOs (often sponsored, incidentally, by private equity). And gone will be much of the capital of the buyers and financiers who until mid-2008 judged that the outlook for freight rates justified bubble prices. [UPDATE: see what I mean?]

Entertainingly, gone also will be the leverage serial price gougers of China inputs – notably that of iron ore extractors like BHP Billiton and Rio Tinto – enjoyed for so long. They may not be looking forward to the next round of negotiations when the past slapping of 75% increases (an annual norm it seemed) are certain to bite back. Already China’s steel mills by some reports are reducing production as inventory levels build.

But despite the collapse in rates alongside the threat of serious shipping over-capacity some will be pleased. Scrappers have been living off crumbs for many years as ship owners kept in service vessels that, in leaner times, would have long been sent to the breakers. They are contemplating a feast of business, a potential investment opportunity covered here back in August 2007.

What is left for shippers? Some (small) comfort, perhaps, can be found in the following chart:


This relationship is not as dead as it looked in December when credit market fear drove yields down extra low. In the short term, rates seem set to rebound modestly - pending new news on the credit crisis and global downturn.


NB: "and all the boards did shrink" - coerced poetry in youth worth something after all. Full Rime here.


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