Recent developments have clearly underlined the market volatility of the Baltic Dry Index (BDI). We talk to Krishna Prasad, chief executive officer of Tradex Marine, about the prospects for dry cargo transportation.
The definition of 'dry cargo' normally varies within the shipping industry. How would you define the term?
The market for dry cargo would normally include material that is solid and dry, rather than something like gas or liquid. There are generally some other exclusions too, such as cargo that requires temperature controlled conditions.
The market has experienced a period of turbulence. This can be highlighted through the Baltic Dry Index (BDI), which represents the cost paid to have a shipping company transport raw materials across seas on the Baltic Exchange, a global hub for brokering shipping contracts.
The BDI has witnessed some significant peaks over the past two years. For example, 2007 was termed as a 'super year' by some analysts and even though the BDI started at 4421 points, it eventually peaked at 11,039 in November.
These are levels beyond a market watcher's wildest dreams in 1986, when figures touched a low of 554.
What has been driving this growth?
The boom in the last five years is the result of heavy demand for steel, combined with the strong economy in several global markets, such as China and India. When the manufacturing base spread to these developing economies, fuelled by their lower cost structure, demand for ocean transport started to flourish.
What impact has this turbulence had on companies in the maritime sector?
The volatility of the market has exposed importers and exporters to higher transportation costs, while the availability of ships and unfavourable terms for the contract of carriage has resulted in challenges for charterers.
In an overheated market, charterers are on the receiving end during negotiations and are forced to agree to terms dictated by owners - thereby exposing themselves to higher risks.
Have external factors in the global economy had an effect on the market?
Yes, there is definitely an effect. The recession in the US, coupled with Chinese exports being affected by changes in domestic labour laws, carries the potential for a softening of the market.
The recent changes to labour laws are estimated to add about 20% extra cost on Chinese exports. Many multinationals with manufacturing bases in China believe that the country is losing its competitiveness. However, the impact might not be immediate in terms of shipping.
How about the soaring cost of oil?
High oil prices have been a constant source of worry for exporters and importers. So far, this factor has failed to have an adverse impact on the freight market, perhaps because of strong underlying demand.
If the operators do decide to 'slow steam' to reduce their bunker costs, it will result in less tonnage supply, thereby boosting the freight markets further.
In terms of your future predictions for the market in general, do you expect a downturn in the near future?
To be honest, there is a school of thought among market analysts who believe that the market for dry cargo transportation is now overheated and needs a correction in the near future.
However, even if this theory is proved true, as long as the commodity prices remain high and the underlying demand for shipping is strong, there is less chance of the freight rates easing up substantially in the coming days.
What factors will sustain the freight markets at such high levels?
Dry bulk markets are known to follow the steel trade. In its short-term forecast for steel usage, the International Iron and Steel Institute predicts a growth of 6.7% in 2008 and 6.3% in 2009.
If this prediction turns out to be even partially correct, the dry bulk market will remain buoyant in the coming months. Although new tonnage was expected to boost the supply of ships during 2008, an analysis of the ships delivered during the first half of the year shows that this has not happened.
Due to the credit crunch and the infrastructural bottlenecks in some shipyards, new deliveries are yet to fulfill expectations.
Some orders for new ships are said to be involving shipyards that do not exist. This will undoubtedly be a factor that may sustain the freight markets at high levels.