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Sinking freight

Monday, 20 February 2012 | 00:00
The slump in the Baltic Dry Index points to the prospects of slowdown and turbulence in the world economy.
Movements in ocean freight rates are a credible and ‘lead' indicator of the ebbs and flows in the global economy. It matters, therefore, when the Baltic Dry Index (BDI) – a composite measure of the cost of shipping dry bulk cargo such as iron ore, coal, steel, grain and fertilisers through 26 representative routes – drops below 1,000 points, which happened last week for the first time since January 2009. This kind of fall (some 50 per cent this month alone) took place last during the economic crisis of 2008, when the index plunged from its peak of almost 12,000 in May to below 700 in December. It could be argued, however, that that too much need not be read into swings in freight rates, as they can sometimes be the outcome of highly localised events. The current BDI downward spiral, for instance, has been mainly courtesy a 75 per cent dip in daily hiring rates for very large vessels carrying iron ore to China. That could change with the resumption of normal economic activity at the conclusion of the ongoing Chinese New Year holiday celebrations. Further, it is possible that the downtrend in shipping rates reflects a crisis more for shipping companies than for the broader world economy. Global trade volumes have not slowed down as much as the massive over-capacity created in the industry. With more cargo ships due for delivery this year, the glut is projected to extend to 2013.
On the other hand, a less optimistic, but more prudent, view would be to regard the declining Chinese iron ore imports as being indicative of a wider slowdown, beginning to impact the world's second biggest economy as well. Coming on top of the Euro-zone sovereign debt woes and a not-so-convincing US economic recovery, it may not be the best of news. Either way, movements in the BDI is something that need to be closely monitored now by policymakers. The fact that charter rates have come down steeply from their post-crisis peaks for not just dry bulk, but for all types of cargo ships (barring LNG tankers and offshore supply vessels), cannot be ignored even by the Reserve Bank of India, as it prepares to unveil its next monetary policy review.
All these have implications for the domestic shipping industry, too. As shipping is a global business, it is difficult to expect Indian companies to escape the effect of freight pricing pressures. Already, domestic lines, including the state-owned Shipping Corporation of India, have reported losses or lower profits in recent quarters. Indian ships carry hardly 9 per cent of the country's own cargo now, against roughly half in the nineties. The share could dip further in the current scenario, which, however, also offers opportunities to acquire tonnage available now at lower cost. The Government can probably evolve a financing mechanism to enable such acquisitions by domestic firms conditional upon, say, these remaining under the Indian flag for a minimum of 10 years.
Source: The Hindu Business Line
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