Monday, May 12, 2008

The little and large of soaring shipping costs

As a follow-up to "Baltic Dry Index Almost Back to Record Highs" we have this from FT Alphaville:

It seems to be the fate of bulk shipping markets to be constantly misunderstood. In January, a precipitous plunge in rates for the largest dry bulk carriers led to a panic that this was finally the leading indicator of the end of the commodity boom. That was even though those involved in the market insisted the main problem was a short-term drying-up of supply of iron ore and coal and a consequent short-term over-supply of ships. Now that the market is again back near record levels - as you can see at DryShips, one of the largest bulk operators - some analysts are again linking rates to a wider economic trend, the spike in worldwide food prices.

The link is definitely there this time - but more weakly than most people realise. Rates for the biggest bulk ships - the Capesizes, so-called because they have to go round Cape Horn and the Cape of Good Hope instead of using the Panama and Suez Canals - have risen far more sharply than those for the smaller sizes of ships. Capesizes are used exclusively for shifting the goods that move in the largest quantities, coal and iron ore. Their high rates consequently cannot be a direct result of strong demand for wheat, soyabeans or any of the other agricultural products that go in bulk carriers.

Instead, respected market observers like Martin Stopford at Clarkson, the London shipbroker, and Howard Bright at Braemar Seascope believe prices are being driven mainly by resurgent demand from steelmakers after the near-closure of the iron ore market earlier this year. “The demand is always there,” Mr Bright says of the iron ore market. “China is hoovering the stuff up. If the supply is available, they’ll take it.”>>>MORE