Zombie ships herald the Mining GFC

I don’t regularly follow the Baltic Dry Index as a direct indicator of economic or market forecasts, but you cannot deny the current price action, as it reaches a record low.

From the Telegraph:

“We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the ’90s, the ’80s and the ’70s, so expressions like ‘living memory’ start to apply,” said Jeremy Penn, the chief executive of the Baltic Exchange in London.

“Ship owners are facing the tough decision of whether to just drop anchor and hope it gets better,” Penn added.

Baltic Dry Index

Fears about the global economy have seen the Baltic Dry Index fall by more than 20% this year, to 369 ā€” its lowest level since records began in 1985.

The immediate problem has been the slowing of the Chinese economy; the world’s largest consumer of commodities has been the driving force behind the shipping trade for the past two decades.

Fine, but this is where the connection between the BDI as a “pure” market price and reality break down. The reason for the slump in the price goes beyond the slowing of the Chinese economy, because while the pace of growth is slowing down, growth is not.

The real reason is like any bubble derived from fundamentally real demand, which requires a real supply response, which becomes self fulfilling as “underlying demand” and “shortages” ramp up prices.

Sound familiar?

 

More:

The world fleet doubled in size from 2010 to 2013. At the same time, China doubled its shipyard capacity and took huge orders for new ships as it sought to control the commodities trade.

China Race World's Biggest Shipmaker

“The dry cargo market was used to growth approaching 10% for quite a few years on the trot,” said James Kidwell, chief executive of the London-listed broker Braemar Shipping. “All of a sudden you’ve hit a market that’s gone flat. That is a radical change.

“If you’ve got more ships than there are cargos, then freight rates are going to be weak ā€” it’s that simple.”

And therein lies the Zombie problem – the bloated fleet is floating on a sea of debt, with equity finance evaporating and banks unwilling to recognise the now toxic loans wallowing on their balance sheets.

Again, sound familiar?

“What is damaging shipping is a zombie fleet, which accepts freight at maverick prices just to keep going,” Kidwell said.

A zombie ship is one that can just about repay interest on its debts but has no hope of repaying the capital.

The situation might be about to get a lot worse for loans to the shipping industry. The calculation of loan repayments and the rate of interest depend on the historic residual value of the ship at the end of the life of the loan.

Kidwell said a five-year-old Capesize vessel was sold for $19 million in recent weeks, 40% below the normal listing price for a vessel that age of about $33 million, and less than half the $48 million cost of a new ship. The scrap value of ships has also plummeted as China pumps new steel onto world markets.

The collapse in prices for secondhand vessels will blow a hole in the balance sheet of any bank or individual that is sitting on those loans.

Luckily, the lucky country is insulated from such shenanigans, having not confused real demand for “underlying demand”, not overbuilt through a massive construction and investment boom, nor use “equity mate” and cheap finance to bet that the Chinese miracle will last forever and a day.

Dodged that bullet didn’t we?

 

Comments

    • Pure gold @StJacques – its brilliant rereading these posts with the benefit of time.
      Looks like the new Manager, Economic and Revenue Forecasting has already been indoctrinated going by the most recent WA forecast.

    • >black swan events are unpredictable
      >WA coat of arms has a black swan on it
      >no one coulda knowed
      >checkmate atheists

  1. She’ll be right mate.

    Just a minor blip. India will come on steam in a couple of years once the right sized brown paper bags are misplaced in the right offices.

  2. And then in around 2025 a massive shortage will build as all that tonnage gets parked on beaches in Goa. And no one will have seen it coming.

  3. The ship owners just need to use some creativity…anchor them in Sydney Harbour and rent or sell the containers out as ocean view apartments. Pure profit baby.

    • I like how you think. Top deck will make a nice heliport for the rich. Run a ferry service out the back for the serfs. Paint the sides with advertising. Boutique Boat People.

    • Won’t need to anchor them- a typical cape bulker will touch bottom in Sydney harbour if it can get in.

      • Line them up down the middle of the harbour and lay a light rail line down the centre of the deck.

        Better still why not just fill in the harbour – except for a fine concrete storm water drain down the middle.

        Lots of new suburbs right next to the CBD that can be filled with 40 storey apartments and light rail. Run a heavy rail line from Palm Beach to Cronulla straight past the heads.

        When you think about it Sydney Harbour is only really used for a few passengers ships and they can go to Botany Bay. Isn’t it about time that we reclaimed some of that ‘dead’ and very wet real estate?

        “..Hey Mr Robb – something else you can sell off shore…”

        Your welcome.

        Port Phillip!!! We can get started on that once Fisherman’s bend is chockers.

        šŸ™‚

    • We could have a boom in house boats, just like the UK has in London. Why rent when you can live on a boat for cheap in Sydney Harbour?

  4. The Chinese are likely to prefer Chinese ships if they are near equal efficiency as they import their domestic shortfall in commodities from significantly Chinese owned miners employing chinese labor on 457’s ore (pun) equivalent.