Iron ore, coal, crude oil haven’t had the best time of it in recent years. A rapid expansion in supply, accompanied by a faster-than-expected slowdown in demand, has wrought havoc on these and other commodity prices.
While they are high profile casualties of the slowdown in global growth, there is another, lesser known but related market, that has endured a similarly tough period of late: global shipping rates.
They’ve been hammered, not only in recent days but also the past few years.
The chart below shows the Baltic Dry Index, a gauge that measures changes in costs to transport raw materials such as metals, softs and energy by sea. Overnight it closed at 383, the lowest level ever in the more than three-decade history of the index.
Like commodities, it too has come under pressure by an unexpected, and quicker, slowdown in the world’s second-largest economy, China.
Fuelled by expectations for endless 7% plus growth from China, and an abundance of cheap capital willing to finance projects, shipbuilders went on an epic building spree in the period before and after the financial crisis, rushing new vessels into production to capitalise on what were strong shipping rates during the twin commodity price booms of the mid and late 2000s.
However, as so many commodity producers have found out recently, bullish forecasts for endless demand growth do not always come to fruition, creating problems down the line given the long lead time, let alone the capital outlay, required to bring supply to market.
Supply deficits can quickly to turn to supply gluts, leading to rapid price declines and falling profitability, or worse.
With global demand likely to remain weak, unless non-productive capacity is removed from these markets, it’s likely that commodities, and tprices to ship them around the world, will continue to remain under pressure.