Summary
The credit crisis and impact of global banking rescue measures may not be fully factored into shipping demand through 2Q 2009.With the result, health of "period charter rate" environment is threatened. Shipping share prices may settle down at subdued levels if both dividends and charter rates take a prolonged dip.
Analysis
The direction of shipping industry has turned rather swiftly reflecting the fact boom to bust can happen without the industry's consent. Prior to recent peaks, BDI (The Baltic Dry Index) was flat for almost 14 years. It was believed to be a period of unhealthy charter rate environment for ship owners and ship brokers while it was conducive to charterers to some extent. BDI hit all time high in May 2008 reaching 11,794 points and during Oct 2008 it crashed beyond anyone's expectation settling down at around 1,292 points.
Ship owners, operators and their funding partners have always preferred long term charters for ships. Under normal operating environment this strategy assures predictability of revenue stream to meet future financing obligations. But in the long run, for the useful life of the asset, it limits earnings growth potential on a per ship basis. Global credit crisis has paralyzed shipping industry and the viability of long term time charter contracts as the sole strategy is being tested. The industry has once again become the casualty of actions of unrelated groups and some of its own over indulgence. History seems to repeat itself periodically in modified versions.
During the past four years stakes have been steadily increased to very high levels due to significant capital investment injected in to the industry. I have been particularly concerned about this type of situation from the structural aspects of shipping markets. At present, long term charter contracts are being reneged or renegotiated to bring day rates in line with current charter rate environment. Lack of proper and active SPOT market mechanism or globally central clearinghouse for absence of better term, charter rate discovery for voyages has become nothing but guessing game mingled with hard ball negotiation tactics with a touch of inadequate guidance from BDI. Today cape size ships are lucky if they can get $12,000 per day and this rate is most likely below breakeven for several ship owners. Compare that to over $230,000 to $300,000 per day rate from early part of 2008. This is unhealthy. To bridge these structural gaps I have been building basic trading version that enables web based perpetual ship fixing channel for physical markets. Any tech solution for this complex problem is not about just matching ships to cargos. The solution cannot be that simple for an industry as complex and as important as global dry bulk shipping.
Demand for shipping is derived in nature and many factors determine the ultimate success in achieving fixtures. In current environment brokers, owners and charterers can perform their duties at the very best talent levels. But if cargo side does not have bank blessing in the form of sufficient funding guarantees for the project, their fixture can fail. We have seen the evidence of this happening due to reduced or practically non-existent issuance of Letters of Credit over the past several weeks. Upcoming Fastfix solution (own creation)in its current skeletal format and with logical additions may be successfully positioned to solve some complexities of global trade. It addresses main concerns for key groups and provides systematic yet simplistic approach to solving the industry wide problems. With increased participation from ship owners, brokers, charterers and their funding partners, Fastfix can become the best alternative channel to avoid cyclical depths in future. Some of the objectives of this patents pending solution are to a) create perpetual ship fixing channel online and offers one central global location for all dry bulk trades b) improve physical SPOT markets for dry bulk ships that assists in more realistic charter price discovery c) increase the global pool of potential charterers to enhance voyage charter opportunities that help establish a more dynamic day rate environment d) substantially reduce the counter party risk exposure prior to committing to a charter and e) provide a unified channel for risk mitigation through an array of about 30 major currencies. Given the recent financial turmoil, the requirement of any online ship fixing solution is clearly to facilitate a better channel for payment arrangements between all participants for the purpose of reducing excessive dependence on traditional financial instruments. This methodology enables direct payments and secures ship owners, brokers’ and charterers positions on a per voyage basis.
When the industry develops a better clearing structure through a centrally agreed clear code of conduct via online channel (win-win framework) and achieves decent SPOT market efficiency, it can pave the way for growth in secondary and derivative markets. Until then we may continue to see blips of activities followed by long periods of lack luster investment as history suggests. Global trade growth story has lot of life left in it and dry bulk shipping with its strategic importance must have efficient, globally transparent IT infrastructure to play its central role to make this a smooth ride. In such perpetual ship fixing market conditions, seasonal worries about demand will be substantially alleviated.
