Global Shipping Has That Sinking Feeling

Something Old, Something New

The financial crisis is creating some rough waters in the shipping industry.

Here’s what By CHUIN-WEI YAP and MOHAMMED HADI had to say in the Heard on the Street column (Credit Crunch Meets Global Trade, Oct. 29, 2008)

Evidence is mounting that the credit crunch is obstructing global trade.

The drumbeats began in August when two Korean ship builders canceled orders because buyers weren’t able to produce initial payments.

The beat got louder as the Baltic Dry Index of shipping rates plunged. It’s now down more than 90% from its mid-May peak.

Then the Globus Maritime shipping company said on Friday it had to sell one of its ships for 29% below an earlier agreed-upon price. Globus, which is listed on London’s AIM exchange, blamed falling shipping activity and increasing difficulties in securing trade finance.

Broadly, shipping and commodities markets are rife with talk that banks are refusing to honor letters of credit from other banks and holding back guarantees commodity buyers and sellers need to ship all manner of metals and soft commodities.

Spurring some of the chatter early this month were the widely disseminated, gloomy remarks of a Thai shipping executive at an industry conference in Singapore. His view — that credit was frozen — was echoed by Moody’s Economy.com, which last week said stocks were piling up as cargo ships got stranded at ports pending the flow of financing. A Maersk Broker report made similar points.

The near-cessation of global credit is at the root of this particular rout.

Also in today’s Wall Street Journal, MARSHALL ECKBLAD wrote an article titled Shippers Hit by Credit Crunch where in he describes the trickle down effect of tightening credit on global shippers.

Companies that need to purchase and ship goods overseas often use letters of credit, or contracts in which banks guarantee a firm’s worthiness for credit. These letters allow companies to take delivery of orders immediately, but pay for them typically weeks or months later — usually after they’ve turned the raw goods into products that they sell to their own customers.

Letters of credit also leave a bank on the hook for its customer’s balance, should the customer purchase goods and then default on its promise to pay the vendor, or the vendor’s bank, later. Because of such guarantees, this form of financing has become hard to secure amidst a financial crisis that has nervous lenders all but refusing to write loans.

According to the Maersk report, shipping companies are facing dwindling demand for their services as customers find “letters of credit being hard to open in these very uncertain economic times.”

This broad freeze in credit for importing goods has left some orders piling up at ports, in limbo between vendor and customer.

Adam Fleck, a shipping analyst at Morningstar Inc., describes a common scenario: A steel supplier’s bank, having hunkered down amid the widening credit crisis, tells a suppliers’ customers that it will no longer release orders based on letters of credit from a customer’s bank.

But the customer’s bank, also hunkered down, refuses to pay for the customer’s order in cash up-front, leaving the customer with an order that it needs, but cannot immediately pay for.

The result? “The cargo basically sits at port,” Mr. Fleck says.

Photo credit: Something Old, Something New by OneEighteen on Flickr.com
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Peter A. Mello

Husband, father, son. Lifelong mariner, student of leadership, photographer. Professional creative placemaker.

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