How low can the Baltic Dry Index go? That is the question the owners of bulk carriersâ€”ships that carry loose commodities such as coal and iron oreâ€”are asking themselves.
Between the start of the financial crisis and January this year, the indexâ€”a measure of bulk freight ratesâ€”had fallen by 95%. Many in the industry had hoped it would start to recover this year. But there is not much sign of thatâ€”and it looks as if more pain is still in store for shipowners.
Overcapacity is the main reason for such low rates. When the index approached an eye-watering figure of 12,000 in 2008, shipyards could not keep up with the orders for new bulk carriers. But then the bubble popped, as demand for commodities collapsed due to the financial crisis, and Chinese economic growth underwent a structural shift away from heavy industry. The index fell to a 30-year low of around 500 in February. There was a modest rebound in the summer, but it did not last.
Shares in dry-bulk shipping lines have tanked as a result. The Guggenheim Shipping ETF, a weighted index of such shares, lost 23% of its value in the first nine months of the year. Some highly indebted operators, such as DryShips, an Athens-based outfit, have performed even worse: its shares have fallen by about 80% so far this year.
As a brief summer recovery has fizzled out, and as some firms have started to run out of cash, there has been a spate of bankruptcies. Several Asian bulk carriers, such as Daebo International of South Korea and Daiichi Chuo Kisen of Japan, have been forced to seek bankruptcy protection. In July, Lithuaniaâ€™s government pulled the plug on its state-owned bulk-carrier line, so bad was its prognosis for the industry.
More dry-bulk lines, especially smaller ones, are likely to go bankrupt in the months to come, says Angelina Valavina of Fitch, a credit-rating agency. This is because banks have slashed their lending to the sector. There are few lines that could afford to take on any more debt.
And unlike in the container-shipping business, the dry-bulk lines are not cutting costs and capacity through consolidation. That is partly because of a lack of co-operation between carriers, but also because there are hardly any profitable firms with the financial strength to take over the stragglers. Without a sustained increase in freight rates, more bankruptcies may be the sectorâ€™s only way back to profitability.
Source: The Economist