Page last updated at 13:32 GMT, Friday, 12 December 2008

Stormy waters for moving freight

By James Melik
Business reporter, BBC World Service

Bulk carrier
Ship owners are laying up their vessels and making their crews redundant

The cost of hiring a ship to move freight around the world has fallen by a staggering 99% in the past six months.

In early June, renting a bulk carrier to transport coal or iron ore would have cost $235,000 a day, whereas now it is barely $2,000.

That brings the Baltic Exchange's sea-freight index, known as the Baltic dry index, to its lowest level since 1986.

Peter Norfolk, a director at the London brokers Simpson Spence and Young, explained to BBC World Service's Business Daily that hiring a ship was a complex matter, with companies hiring and then re-hiring to third and fourth parties.

"You might rent a vessel for $100,000 a day for two or three years," he says, "and then hire it out at "$120,000 a day."

This market relies so much on the Chinese economy
London broker Peter Norfolk

Unable to hire them out at a profit, some companies are returning their ships early.

Ship owners are now having to lay up their vessels and, apart from a skeletal crew to manage essential electrical and mechanical maintenance, other crew members are being made redundant.

China's crucial role

The collapse in price had been greatest for the biggest ships - called the Cape-size carriers, because they are too big for the Suez Canal and have to go round Cape Horn between Europe and China.

Part of the reversal has been caused by the change in the steel industry, which in the first part of the year was still growing by about 6% annually but which is now experiencing negative growth.

grain growing in a field
Along with coal and iron ore, grain is shipped by bulk carriers

"For the past five years we have seen a very strong demand for industrial commodities which supported the shipping industry, but all of a sudden the situation has been reversed," says Peter Norfolk.

More than 50% of all bulk cargoes are related to the steel industry, which reflects the fundamental economic growth of most nations.

Grains are also transported by bulk carriers and countries such as China rely on imports to feed its population.

It ought to be good news for the consumer as the cost of shipping goods around the world decreases, but Peter Norfolk warns that if people can't afford to ship goods then there will be an impact on trade.

"This market relies so much on the Chinese economy", he says, "so unless there is some rebound in demand there is unlikely to be much improvement.

Relative calm

Although the market for container shipping has weakened due to the collapse in demand from Europe and America for Asian goods it remains, for the time being, a comparatively healthy sector.

Crane unloading ship at docks
Container ships have yet to feel the full impact of the economic slowdown

At the end of September, there were 4.600 container ships moving around the world whilst only 80 were at anchorage.

However, the world's second largest container manufacturer, Singamas, says it is operating at 60% of its normal level due to the slowdown in Chinese exports.

Meanwhile, companies which have invested in shipyards to build vessels are now facing question marks over their financial viability and many of them are having to reconsider their strategy.

An interview relating to this story can be heard on the Business Daily podcast dated 9 Dec 08

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