The cost of shipping large volumes of cargo has fallen 95% since 2008 to a new all-time low. That might mean the global economy is in big trouble. But it’s only part of the story.
If you wanted to, you could rent a 168-meter cargo ship tomorrow for around $4,000 (fuel not included). That ship (similar to the one in the photo below) can carry 50,000 tons of dry goods – that’s as much as 10,000 elephants. If the ship were filled with coal, you’d be able to power 24,000 apartments in Singapore for an entire year.
Or, for about the price of renting that ship for two nights, you could stay at the nicest suite at the Ritz Carlton in Singapore (around 280 sq. meters, great views) for one night.
About eight years ago, renting that ship for a day would have cost you closer to $80,000 – a lot more than a night at the Ritz.
What’s happened? The Baltic Dry Index, which tracks the price of shipping dry bulk cargoes (iron ore, coal and grain, for example) by sea, just hit another all-time low. It’s down 96% from its highs in 2008, and down 60% from its 2015 highs. It’s even down 25% from the December 2008 lows of the global economic crisis.
A lot of people look at the cost of shipping cargo as an indirect way of measuring the health of the global economy. “The [Baltic Dry Index] has always been used as a bellwether indicator for global trade conditions and the state of the international economy,” says Business Insider (in an article titled “We just got a major sign that world trade is crashing”).
Part of the problem is that the prices of the commodities these big ships transport have dropped. The Reuters/Jefferies Commodity Research Bureau Index, which looks at the price of a range of commodities like oil, wheat, gold and gas is down 24% so far in 2015.
It makes sense that if the stuff you’re transporting falls in value, the cost of transporting the (now cheaper) stuff should also fall.
The cost of renting out these big ships has fallen a lot more than the prices of what they ship, though. Some people think this means commodity prices are going to fall even more.
But the cost of renting cargo ships is also based on supply and demand. During good times for the industry a few years ago, when there was more demand for shipping than there was supply, some shipping companies ordered more ships. But because they take years to build, these new ships only became available recently – a long time after the extra demand had gone away.
So now the shipping industry has a lot more ships than customers. Every day that a ship sits empty, the owner has to pay around $10,000 (depending on the size, age and location of the ship) for maintenance, upkeep, fees, and many other things. So the owner would rather rent out the ship at a loss (at, say $4,000 a day) than make nothing at all on his ship. (The owner would like to rent the ship out for a lot more. But, because there’s so many more ships than there is demand, he can’t.)
A lot of shipping companies are struggling. The share prices of many dry bulk-shipping companies, like New York-listed Scorpio Bulkers, Genco Shipping & Trading, Eagle Bulk Shipping, and Diana Shipping have fallen sharply. Worldwide, a number of companies in the sector have filed for bankruptcy.
The Baltic Dry Index will probably remain low for a while. The economic slowdown in China – a major customer of big ships – will hurt demand. Lower commodity prices are also hurting demand. But the bigger problem is there are just too many ships. And that’s not going to change until more shipping companies go out of business – or until the Ritz starts renting them.