World Grain - December 2008 - 29

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7I
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FEATURE: FREIGHT RATES PLUMMET

lapse and any recovery should not be overlooked.
The recent disintegration of freight rates does not, at first
glance, seem to be anything unusual for shipping. Historically,
the highly fragmented bulk carrier market has been characterized by impossible highs followed by deep troughs as owners
have splurged on new vessels, rapidly undermining any prospect of a stable supply-demand balance being reached. But the
collapse of the market this time has been both more sudden and
far harsher than any previous trough, including the mid-1980s.
Since 2003, China's insatiable demand for raw materials,
a growing world economy, rising port congestion and the
emergence of new long-haul supply routes - most notably
South America to Asia, which sucked capacity out of the fleet
- helped push bulk freight rates to new peaks as vessel and
infrastructure supply struggled to keep up with demand. The
upshot for international grain trades was ever higher ocean
freight costs.
As recently as June, just a few months after the first signs
of a credit crunch emerged, most analysts were predicting that
rates would remain at a "higher plateau" for some time to
come, with some asking if charterers "might see any respite."
MANY REASONS FOR SLUMP
A number of factors have colluded to prompt such a rapid
slump. The economic slowdowns in Europe and the U.S. have
affected demand for many goods, and this has filtered through
to raw material markets. A widely anticipated bounce-back in
demand from China in the aftermath of the Olympics failed to
materialize, and the credit crisis then froze markets, with importers and exporters afraid to commit to cargoes without receiving cast-iron assurances from banks, which is no easy task
in the present financial maelstrom. The fall-off in demand also
allowed many load ports to clear backlogs, which, given that
for the last few years about 10% of the capesize fleet and large
chunks of vessels in the smaller categories have been stuck in
port queues at any given time, had the effect of freeing up a
large amount of capacity just as demand fell away.
But a key factor in the downturn has been sentiment. For
some time the bulk markets have been highly volatile, and
lurking at the back of the equation was the looming orderbook of newbuilding vessels due for delivery over the next
four years. Once the market turned, optimism over the forward supply-demand balance for bulk carriers turned to a
deep pessimism.
For grain shippers, this meant freight rates fell in the space
of just a few months to levels that were simply unimaginable
in the summer. A welcome respite, no doubt, but the sight of
a distressed shipping sector, which is vastly over-leveraged
financially, does not bode well in the long-run for charterers
who rely on safe and reliable services.
It is already becoming apparent that major defaults in the
physical and paper shipping markets will be revealed by traders and operators in the months ahead, and this could bring fur-

For more information, see Page 82.

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World Grain - December 2008

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