Baltic Indices and the direction of freight markets

Implications: The Baltic Exchange was in operation since the colonial times for well over 250 years. The core thinking at the exchange has not changed much till date. The freight markets are very close markets and have remained so for better part of 20th century. The exchange had successful period of being able to transact over 35% of global dry bulk markets and 50% of tanker markets.The availability of internet technologies is threatening the traditional walls of the exchange.

Analysis:

The exchange had successful period of being able to transact over 35% of global dry bulk markets and 50% of tanker markets.
The availability of internet technologies is threatening the traditional walls of the exchange. If I understand correctly, the exchange had over 2500 members around 2002. Right now in 2008 they have around 550 members or there about.

The business scope of these members may vary from ship owning, ship brokerage, cargo interests of dry, tanker and other freight segments to professional service firms, attorneys etc. Since the fall of dollar in the post 9-11 world and china factor, the freight markets have
expanded by leaps and bounds while the exchange's membership has dwindled. They have tried to launch an electronic format during 2002 period which was a miserable failure. Their relevance to the broader global freight markets has diminished till 2004-2005 when Imarex, the Oslo, Norway based maritime/freight derivative exchange started to take baltic indices as core basis for physical markets and had created freight derivative products and sold to various financial institutions.

I see a fundamental "STRUCTURAL DEFICIENCY" in the market place where the true physical markets to a greater extent have moved away
from the Baltic Exchange, making the data it puts out lesser reflection of broader global dynamics.

The FFA's or Freight Forward Agreements are future expectation of direction of freight rates. Whether they translate into time charter rates in the sub-let markets or per ton freight rate in coal, ore or other trades, the final rates are always subject to much change and interpretation based on operational details on the ground. Most major bulk trades such as large contracts of affreightment in traditional terms are concluded via close door negotiations with marginal relevance to general market sentiment. This kind of business practice seem to be fast changing due to significant day rate changes for all types of ships and also due to ever increasing ship prices during the past two or three years. Each freight contract is a discussion by itself because all freight contracts are not created equal. The freight rates primarily depend on type of ship used, exact break-even point for her owners, load-discharge ports and countries, type of commodity being carried, load-discharge methods, equipment used for such operations and to say the least port/personnel efiiciencies determine final tally of per ton rates. These exact details are seldom reported as they are more of confidential nature that might contribute to competitiveness of specific commodity trades. The big picture view on dry sector is annually over 3billion metric tons of cargo is transported to over 9600 ports globally on about 6500 ships. Any index that does not reflect, to a decent extent, this reality may not do a good job.

With the current charter rates falling across the shipping asset classes especially dry sector, many owners may be left with holding the bag. If the downward spiral in charter rates continues on its current path it might affect the second hand ship prices significantly. With fewer recent sales being reported in dry sector, the last done figures are not exactly best guidance to buyers looking to step in. Broader charter market dynamics are dictated by spot and period rates obtainable in lifting specific contract(s) in nodal points of activity.

In conclusion, baltic indices, in their current form, may not be considered as most accurate and reliable indicators of broader dry bulk freight markets. Emerging markets with expanding domestic financial markets and with own national agendas for shipping are tilting the balance. While we can still continue to attribute importance to the index, we have to excercise sufficient caution in interpreting it.