Shipping rates free fall
Shipping rates free fall have got investors thinking whether the sector is experiencing a systemic change where prices are adjusting to the disruption to globalism in this new era of trade protectionism.
It is true to say that many sectors are experiencing peak earnings, particularly if their product or service is subject to discretionary spending the drop in Q1, 2019 earnings growth highlights declining corporate profits.
The shipping rates free fall suggests that this particular sector could be first in the line of fire if global business is adjusting to a new reality of trade protectionism.
The Baltic Dry Index (BDI) shows shipping rates free fall playing out following the third week of January
BDI is a shipping and trade index created by the London-based Baltic Exchange which measures a change in the cost of transporting various raw materials.
Notice that the BDI chart, see here,is currently at 601 (at the time of writing this piece) which is a 52 week low and down nearly 50% from a year ago. In short, shipping rates have crashed again
The shipping rates free fall could be more than a seasonal late January correction
US-China trade war could soon be about to escalate with the current US administration expected to raise the tariff rate on $200 billion in Chinese imports from 10 percent to 25 percent.
With no breakthrough from the recent trade war truce in sight (at the time of writing this piece) as the two world’s heavyweight economic powers appear unwilling to compromise, entrenched and digging in for the long haul there is chatter that maybe we are witnessing the end of peak globalism.
“If you are a bulk owner, you can no longer depend solely on China to make money, and that’s a seismic shift,” said a London broker.
The rationale for shipping rates free fall is straightforward
Making more domestically means importing and exporting less globally which simply means collapsing demand for sea freight services.
By contrast domestic road transport in the US is booming. Demand for US road freight is so robust, which is evidence of an economy ticking over nicely, that there is a shortage of truck drivers.
So changing geopolitical and macro trends makes it difficult to gauge the health of economies. Investors/traders cannot take what was previously a good indicator, such as the BDI and then conclude that plunging BDI means the global economy, the US economy must be in decline.
Why then is road haulage demand booming in the world’s largest economy?
Shipping rates free fall could mean a changing trend is underway
Globalism with its multilateral trade accords could be in retreat and if so Americanism with bilateral trade deals slanted in favor of the superpower would probably replace it. But for Americanism and a dollar-centric transatlantic world to prosper there would need to be no other alternative.
Superstates, like the European Union (EU), is a potential rival, a threat to US hegemony The EU transatlantic rift is widening and pivot to the East is accelerating with the European trading bloc developing an energy policy outside the USD centric world.
Nord Stream, a Russian pipeline to Germany will fuel Europe’s largest economy and simultaneously make NATTO’s role in Europe irrelevant. Moreover, recently the EU has developed a new Iran trade mechanism in non-dollar trade with Iran. So today there exists an alternative to the dollar-centric world which supports multilateral trade accords.
So the shipping rates free fall could also be reversed if the Trump administration’s Americanism results in US isolationism. What if the rest of the world promotes trade amongst itself, creating cozy trading blocs, thereby excluding the US? In this scenario the US economy would retreat, domestic unemployment would rise and the US electorate could revolt against the current administration and vote in a pro multilateral trade, anti-protectionist globalist US government.
In the short term, the shipping rates free fall means overcapacity in the sector
Dry bulk shipowners face a long period of uncertainty as spot prices collapse and China shipments shrink. A slowing global economy, coupled with weak demand from China over the Lunar New Year and from Brazil after Vale SA’s iron ore disaster, is dragging shipping rates to near record lows, and few in the industry expect things to improve any time soon.
“Along slowdown in the Chinese economy will hurt commodity demand and send shipping rates sharply lower,” said Bloomberg Intelligence industry analyst Rahul Kapoor.
“Everyone is looking for a catalyst to push the market up, but it’s not there,” said a Singapore broker.
So prospects for the shipping sector are extremely challenging and show no signs of improving anytime soon.
The free fall in shipping rates could mean a blood bath for the sector
Overcapacity and a price war could soon be on the horizon. Indeed, sea freight companies cut prices in 2013 to compete for dwindling business. A piece in Forbes entitled Blood in the Water: Shipping Lines’ Price War Rages On highlighted the sector’s woes.
Shipping rates free fall could make the sector the big short, assuming escalating trade tensions between US-China going forward. Already there have been a number of high profile bankruptcy in the sea freight sector with Hanjin shipping, the world’s seventh-largest container shipper declaring itself bankrupt in 2016. Ultrapetrol, an energy container shipping company with $566 MM in debt, filed a pre-packaged Chapter 11 a year later. The week before, Toisa and 23 affiliated vessel owing companies filed for Chapter 11, with over $1B in debt.
So the recent shipping rates free fall could read blood in the water.