Trade Woes Continue, Tight Credit a Major Culprit

Reader Chris pointed us to some stories today on the difficult conditions in the shipping industry, the result of a falloff in trade. From Bloomberg:

At least 20 percent of the vessels most commonly hired to haul coal and ore are sitting empty as steelmakers cut output and dwindling trade credit halts deliveries, Lorentzen & Stemoco A/S shipbroker Kjetil Sjuve said.

Fifty to 100 so-called capesizes, each bigger than The Trump Building in New York, have been unable to find cargoes or their owners won’t accept rental rates that have plunged 98 percent in five months, Sjuve said by phone today. Normally about 250 such carriers compete for spot bookings, he said.

“There are simply no cargoes,” Sjuve said from Oslo. “It’s primarily the steel market but it’s even more difficult due to financial markets and letters of credit in particular.”

ArcelorMittal, the world’s biggest steelmaker, on Nov. 5 said its global output will decline by more than 30 percent. Cia. Vale do Rio Doce, the world’s biggest iron-ore producer, last month said it will cut production. Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance.

Letters of credit are centuries-old instruments that transfer payments internationally from buyer to seller once shipments have been delivered…..

Capesizes are the second-largest commodity transporters, after very large ore carriers…

As many as 20 percent of shipping lines are at risk of breaching their loan accords because the decline in rents has caused a similar plunge in ship prices, Tufton Oceanic Ltd., the world’s largest shipping-hedge fund group, said last month

Reader Michael sent us a Lloyd’s List article that discussed that government rescue operations have not led to meaningful improvement in letter of credit issuance. There has been a flicker of improvement in the last two days, but observers are not certain whether it is the start of real progress or a mere false positive:

Banks are still not issuing letters of credit despite being bailed out by governments, as shipowners complain that dry bulk trades remain trapped by the fall-out from the global financial crisis.

With many cargoes unable to move because of the letters of credit famine, shipowners are leaving ships at idle rather than accept rock-bottom freight rates in today’s depressed bulk markets, said Dale Ploughman, chief executive of Athens-headquartered Golden Energy Marine.

The company operates a 65-strong fleet that includes tankers, bulkers and reeferships.

Some banks resumed issuing letters of credit a couple of weeks ago, but now appear to have withdrawn again.

Speaking to Lloyd’s List during the annual general meeting of the Bahamas Shipowners Association, Mr Ploughman urged banks to start issuing letters of credit again so that the bulk trades can return to more normal conditions.

But until that happens, “a lot of ships will stay at anchor”, he said.

Shipowners and operators believed a sharp rise in fixtures recorded yesterday for panamax and supramax vessels could signal improved access to letters of credit…

“It’s an indication that more cargoes are coming on the market… I think it’s too early to tell the longevity of it,” he told an investor conference call yesterday.

He also said it was “still a little too early to see the impact of the global stimuli coming from governments to jump start economies and, as a corollary, world trade. But we hope to have more visibility in the next couple of weeks”.

It was the first time in his career as a shipowner that letters of credit had impeded dry bulk trade, Mr Zoullas said.

This story from the Globe and Mail discusses the impact of the trade slowdown on Canadian ports, which Canada’s Financial Post had said in an earlier story felt the effects later than those in the US and Mexico:

Canada’s ports face challenging months ahead as a global slump in shipping and weakening economies cut into traffic coming in and out of cities such as Vancouver, Montreal and Halifax.

The slump will likely be a double blow, hitting inbound and outbound activity. Outbound traffic is lessened as global demand for commodities such as coal, potash and oil falls and inbound traffic, including containers carrying retail goods, gets hit by reduced demand from lower consumer spending in North America.

Port Metro Vancouver, the country’s largest port, is already seeing fewer containers arriving in what’s normally a busy season ahead of Christmas. The port also expects there could be decline in containers next year.

“Needless to say, the second half of this year isn’t as good as the first half, and we expect easing off as we head toward Christmas, particularly in the container business,” said Christopher Badger, chief operating officer of Port Metro Vancouver.

One ominously negative indicator is the Baltic Dry Index, which tracks the cost to ship commodities by sea. The index peaked in May and is down about 90 per cent since then. It has ticked up slightly over the past two days after falling every day for a month.

“It’s a relatively good barometer for the economy and the signal it’s sending is that we’ve gone from potentially overheating to ice-cold in the space of six months,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

The latest figures for ports across North America already show container traffic sliding. The amount of electronics arriving in October was down 9.6 per cent from a year ago and clothing was down 7.8 per cent.

Yesterday, the International Monetary Fund cut its forecast for global economic growth in 2009 to 2.2 per cent, down from a prediction of 3 per cent one month earlier. The new forecast is effectively a “global recession,” said Jock Finlayson, executive vice-president of the Business Council of British Columbia. The IMF also projected recessions in the United States, Japan and Europe…

About $140-billion worth of goods moves through Canada’s ports each year, according to the Association of Canadian Port Authorities. That traffic, in turn, generates more than $20-billion in economic activity and supports 250,000 jobs.

Even before the financial crisis this fall, economic cracks were beginning to show at some ports. Port Metro Vancouver saw total tonnage moved in the first half of the year fall 5 per cent, compared with the corresponding period last year. Container traffic was still rising, up 6 per cent.

In Halifax, the port saw a 16-per-cent drop in cargo volumes in the first half of 2008, a trend that remains in place…

In Prince Rupert, a new $170-million container terminal has capacity to handle 500,000 containers annually but has been slow to fill up, with just 102,775 TEU (20-foot equivalent units – the industry’s standard measure) tallied for the first nine months of the year.

Some ports are still doing well. The Port of Montreal this week reported container traffic up 9.9 per cent in the first nine months of this year, a trend chief executive officer Patrice Pelletier said remains generally intact. The port is forecasting growth for next year, although Mr. Pelletier said it was trimmed to 5 per cent from 7.

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  1. Matt Dubuque

    For those who snickered and sneered that HYPERdeflation was simply not possible because the Fed would simply “wave a magic wand” and “print money” (DUH, Treasuries are AUCTIONED and subject to bid/ask….), note the following excerpt from this fine piece Yves posted:

    “rental rates that have plunged 98 percent in five months”.

    A price collapse of 98% in 5 months. If hyperdeflation is defined as a decline of over 8% in prices in a month, this is CLEARLY a deflationary microburst.

    Will there be more to come?

    Stay tuned.

    But clearly we need the word hyperdeflation in the parlance to describe some of what we are beginning to see and the risks we need to manage.

    Risks the St. Louis Fed, darling of the WSJ and the American press, does not understand.

    Matt Dubuque

  2. mft

    I found this posting a bit confusing. The articles quoted switched back and forward between demand issues (steel industry collapse resulting a cancelled iron ore contracts) and credit issues (letters of credit not issued because of general loss of confidence). They didn’t even really analyse the relative importance of these causes or even distiguishing clearly between them.

    Could it also be that banks are not issuing letters of credit for altogether good reasons – suspicion that the cargo may not be accepted on arrival because of the rapid pace of downturn in the real economy? I suspect that banks would behave that way even if there were not a financial crisis.

  3. Anonymous

    4:04, that was really rude, and Yves does not approve of that sort of thing. If you don’t agree with someone’s comment, you owe it to explain it to them.

    mft, you do not understand how L/Cs work. The L/C is issued by the buyer’s bank, at least for a documentary L/C so that the seller knows that the buyer can pay. If it is a documentary L/C, the payment is made when the seller meets the documentary requirements under the L/C. Basically, if the seller lives up to its side of the deal, the payment is made. But L/Cs are being rejected by the seller’s bank, and this is BEFORE the shipment leaves port. Banks do not want to be exposed to the risk of other banks, particularly on funky credits like L/Cs.

  4. fred

    Matt Dubuque: You’re fixating on one tiny sector of the world economy. That’s like saying we had hyperdeflation back in 2001 when imploded. I’ll believe in hyperdeflation when I see federal government expenditures (defense, social security, medicare, etc) crashing in nominal terms.

    Hyperdeflation would probably be a good thing, because it would wipe the system clean of a lot of rubbish that’s been built up in the past 80 years, and force a rethinking of everything in our economy. Which is exactly why we won’t get hyperdeflation. Too many powerful interests would be hurt. Nor will we get hyperinflation, for the same reason. We’ll either get mild deflation or mild inflation, with the former more likely in the short run and the latter almost certain in the long run.

  5. mft

    anon@4:32, thank you for your explanation, and also for adding the comment in your first paragraph.

    Actually, I have understood that it is the issuing banks that are acting cautiously, not the sellers’ banks. That at any rate is the point made by the Times Online article quoted in Yves post of Nov. 2nd – (

    A couple of quotes:

    “buyers of goods are being denied access to letters of credit”

    HSBC: “the cost of guaranteeing a letter of credit, a routine instrument used for payment of goods, has doubled”

    Maersk Broker: “Banks’ refusal to offer letters of credit has resulted in very few fresh cargoes reaching the market”.

    Have I really misunderstood this?

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