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Freight rates begin to fall for world merchant fleet

03 November 2008

Review of Maritime Transport 2008 suggests early 2008 marked the high point of the shipping boom

Geneva, 4 November 2008 - International seaborne trade in 2007, driven by emerging and transition economies, surpassed a record 8 billion tons, the Review of Maritime Transport 2008 (RMT) reports. Strong demand for shipping services helped push to unprecedented highs the cost of moving dry bulk commodities internationally, as echoed by the Baltic Dry Index (BDI) through the first quarter of 2008. (The BDI is a composite of shipping prices for various dry bulk products such as iron ore, grain, coal, bauxite/alumina and phosphate, and is a useful indicator of price movements.)

More recently, however, the BDI has declined more than 11-fold: from 11,793 points in May 2008 to 891 as of early November. This shows that the unfolding financial crisis has spread to international trade with negative implications for developing countries, especially those dependent on commodities.

The immediate effect of declining freight rates for the developing world is mixed. Lower freight costs lead to lower prices for delivered traded goods. Both exporters and importers of food and other commodities thus benefit from lower freight costs, and inflationary pressures are eased. For most commodities shipped in bulk, freight rates account for a high portion of the final value of the goods. Shipments with lower value to weight ratios are more sensitive to variations in transport costs. Because developing countries´ trade is dominated by trade in commodities or low-value manufactured goods (such as steel products), a drop in shipping rates benefits their trade under normal circumstances. However, a rapidly falling BDI is also accompanied by reduced demand for shipping services, increasing the effects of the financial crisis and global demand for goods. This will negatively affect many developing economies.

Global merchandise trade had grown by 5.5% in 2007, almost 2 percentage points higher than the growth of the world´s Gross Domestic Product (GDP) for the year. Dynamic emerging developing and transition economies drove the increase in international seaborne trade up 4.8% in 2007. In tandem with economic and trade expansion, demand for shipping services increased to reach 32,932 billion ton-miles -- a 4.7% jump. World container port throughput grew by an estimated 11.7% to reach 485 million TEUs in 2007, the Review reports. However, port investment, running at a peak levels until recently, will now be curtailed until the international trade flow situation becomes clear.

By early 2008, the total world merchant fleet had expanded by 7.2% over the previous year to reach 1.12 billion deadweight tons (dwt). Never before had the world´s merchant fleet been so large. The order book for new vessels in 2008 was also at its highest level ever: 10,053 ships with a total capacity of 495 million dwt, including 222 million dwt of dry bulk carriers. The order book was equivalent to 28% of the current merchant fleet by number of vessels over 1,000 gross tons (GT), while in terms of tonnage it was equivalent to 44% of the current fleet. Nevertheless, as of mid 2008, there was already evidence of cancellations of new ships on order, which could have a major impact on the shipbuilding industries of countries such as China, South Korea, and Viet Nam.

Shipping operators faced with considerable losses may decide to scrap older tonnage. This has potential implications for steel prices as well as for jobs in major ship-breaking nations such as Bangladesh and Pakistan. At the same time, while discarding older ships may have a positive global environmental impact, intensified ship scrapping activities pose challenges for safety, health, and environmental conditions in these developing regions. International port terminal operators have also announced suspension of some major port expansion plans owing to the foreseen decline in demand for shipping services.

Downloads [PDF]: | Review of Maritime Transport 2008 | [200 pages, 2587 KB]

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