The dramatic collapse in dry bulk freight rates has hit the headlines around the world, with financial market watchers including the BBC’s Robert Peston using the Baltic Exchange’s Dry Index as a bell weather of the global economy.

The Baltic Exchange average for its four timecharter routes has dropped to below $10,000 per day. Source: The Baltic Exchange

However, Khalid Hashim managing director of major Thai based handysize bulker owner Precious shipping says that dry bulk demand will come “roaring back” after a couple of months or so.

“The last time that we saw the BDI fall below 1,000 points and continue in a southerly direction and reach its lowest level of 554 points was in July 1986. At that time it was the mountain of new supply of ships entering the freight markets that had led the BDI to reach its lowest levels ever.

"This time around the avalanche of new ships has not yet arrived, and may be permanently delayed due to the critical lack of funding due to the worst-ever financial crisis being faced by all banks all around the world, and yet the BDI is sinking towards these historically low landmarks.

"The underlying demand for cargoes is still very strong as the fundamental drivers of an increasing population; rapid wealth creation; changing eating habits; rapid urbanization and infrastructure growth are all still very much in place and remain resilient and undaunted by the current financial crisis dominating the world news papers and television channels. The financial crisis may have dampened these factors for a while but please bear in mind that it can not hold them back for long or forever.

“What I was able to gather at my recent meetings as the main reasons people gave for the collapse of the BDI could be summarized as follows:

• The Chinese are not buying any iron ore at present.
• The Olympics and the Para Olympics were the reason behind the stoppage/slow down of Chinese iron ore imports.
• The Chinese were on their Golden Week Holidays and on return have not as yet resumed their business-as-usual activities.
• Steel prices have collapsed and hence Steel Mills in China are slowing down/cutting production figures.
• The financial crisis was slowing down global activity and that was leading to a loss of cargoes.

“Whilst most of the above common perceptions may be accurate to a degree they cannot explain the fact that the BDI has, since 20 May 2008, lost more than 86% of its value by the 15th October i.e. in less than 5 months time we have seen an absolute collapse in this index from a high point of 11,793 points to the current 1,615 points.

“One common misconception that I would like to bust at this stage is the slowing down/lack of Chinese iron ore imports. As per preliminary trade data available, China’s iron ore imports totalled 39.2m tonnes in September, a year-on-year rise of 6m tonnes. This represents only the third time monthly imports have been above 39m tonnes and occurred despite persistently high stockpiles at China’s ports. Year-to-date imports of 346.5m tonnes are 22% up on the same period in 2007.

“So if it is not iron ore imports, then what is the culprit behind the collapse of the BDI?

“The recent article in Bloomberg date lined 14 October 2008 attributed to me covered an anecdotal piece of evidence that I had conveyed at the Marine Money conference at Singapore covering the poor experience that one of our clients had had with a Letter of Credit (L/C) encashment with a leading bank in Dubai. The client confirmed that despite having all the required pieces of paper to encash the valid L/C he was told by the bank that they simply did not have funds to pay him!!

“Since then I have had trade colleagues and others involved in shipping stating that they are hearing of L/Cs being cancelled or recalled in Australia, Indonesia and other places. We have heard that American banks are not accepting L/Cs from banks that they are not comfortable with as a result exports out of the USA are falling very quickly and exacerbating the already perilous flow of cargoes.

“Please however bear in mind that anecdotal evidence by its very nature is very hard to track down or verify but the fact that the BDI continues to drop, despite conventional wisdom suggesting that there would be a sharp bounce back as soon as the end of next month, makes me think that trade disruptions are more the norm than the exception but this fact has largely not as yet been picked up by the people who can, and should, rectify this situation.

“Having said all of the above I also think that such situations take time to reverse and normalise so I am expecting at least a couple of months of this disruption to continue before trade finance and cargo flows get back to more normalised levels. In the meantime real demand for cargoes is simply being converted to potential or latent demand so long as the trade credit cycles do not normalize. As and when they do normalize, you should expect demand to come roaring back with potential and latent demand translating into real demand and a plethora of real cargoes.”

Click here to listen to Baltic Exchange chief executive Jeremy Penn on BBC World.

Maritime London member and shipping market analyst Fred Doll appeared on American Public Media last week together with Douglas Mavrinac, the head of shipping research for Jeffries and Company

Today, the Baltic Dry Index dropped a further 83 points and stands at 1355 points.

Readers of London Matters are invited to complete a Maritime London questionnaire to give the association a better understanding of the needs of the UK based maritime services industries from both members and non-members alike.

The closing date is 24 October.

Despite the deteriorating shipping markets, global maritime recruitment firm and Maritime London member Faststream says that it is experiencing strong demand from its shipowning, broking and commodity clients for commercial shipping candidates.

Writing in the company’s new quarterly Maritime Employment Review published today, managing director Mark Charman notes: “Our clients are telling us that they expect to continue hiring people in the New Year. Driving this is the huge growth of the global merchant fleet which continues to expand at a relentless pace and needs a wide range of skilled professionals to service it.”

Focusing on chartering and shipbroking roles, the Faststream Maritime Employment Review reports that as many companies did not recruit during the poor shipping markets of the 1980s and 1990s, a generation of shipping people have reached the traditional retirement age, but continue to work.

The report notes: “If in the long term freight markets return to the levels of pre-2003, then we predict a flight of shipbroking and chartering experience.” Faststream notes that the average length of service within a company is now between three and five years and companies are focusing on offering better packages.

“We are seeing companies offering more flexible hours, improvements in the work environment, free lunches and other initiatives.”

The report also reveals that this year’s changes to the UK’s “non-dom” tax regime whereby UK resident but non-domiciled individuals are taxed on their overseas earnings has not as yet led to a flight of commercial shipping to Athens, Geneva and Monaco.

The report notes: “Certainly the attraction of low personal tax regimes of locations such as Dubai, Singapore and Geneva are often cited by candidates as a draw, but are not usually a decisive factor for seeking a move out of the UK. The quality of company, career prospects, benefits, lifestyle and salary are generally the more important factors.”

EU shake-up of liner shipping conferences came into effect this weekend

After over 100 years of liner shipping conferences, during which time London played a central role in their administration, the collective rate setting bodies became illegal on trade to and from the EU from Saturday.

Shippers' body, British International Freight Association (BIFA), welcomed the end of liner conferences as “a new era for shipping and trade liberalisation”. The liner shipping industry, however, while changing its practices to meet new EU guidelines is bracing itself for another.

BIFA director general, Peter Quantrill said: “No one can know for certain what the impact of the demise of liner conferences in the EU will be and many of our members are understandably sceptical about the potential benefits. However, if we look at what has happened in the airline industry since de-regulation, one can reasonably expect some form of additional restructuring in the sector over the medium term and impetus to new business models and innovation.”

He added: “One can reasonably assume that this development in Europe will not have been lost on governments in other parts of the world, some of which are already considering whether to follow the EU’s lead. The abolition of liner conferences in Europe may prove the catalyst for a wider shake-up in the international shipping industry, in respect of the deep sea movement of unitised cargo.”

For the European Liner Affairs Association (ELAA) executive director Chris Bourne, the focus is now how much freedom lines will have to work together in consortia and alliances.

He said: “The EC’s Directorate of Competition (DG Comp) is currently reviewing the Block Exemption Regulation (BER) that expires in 2010 and currently defines how liner consortia operate within EU competition law. These consortia are crucial to the efficient provision of competitive shipping services to industry and retail markets throughout Europe. Any revision of the regulation must be well-advised and take care to safeguard the benefits the system brings to all users of European shipping services,” he said.

Speaking at European Shippers Council’s Shipper’s Forum in Oslo last week, Mr Bourne said that consortia were essential, especially when, as now, lines have to manage their resources and cargo carrying capacities in a market environment that has experienced double digit growth in demand over the last five years, and is now, at best flat.

He said that in such circumstances the benefits of operational consortia in maintaining a level of service from the perspective of both regularity and spread of ports are “clearer than ever”. Bourne outlined a further change with which the lines are currently coping. Now as liner conferences have become illegal due to the repeal of the BER covering them (effective 18 October), DG Comp has turned its attention to consortia.

“We knew that a review was in the offing but had been assured by administrators within DG Comp that the consortia’s BER, up for renewal in April 2010, would be maintained. However we are now presented by DG Comp with a new draft BER for consortia “that looks very different from the existing one.....and we are allowed just one month’s consultation period”.

Mr Bourne stressed: “The lines will not stand idly by in such difficult commercial times and see the most effective tool for reducing shipping costs for all, be rendered impotent,” he emphasised.er.

The turmoil in the world's stock exchanges and the consequent uncertainty over the returns on the substantial investments P&I clubs have relied on to cover shortfalls in premium income is set push up the amount shipowners must pay for their liability insurance. While all the clubs have been trying to increase premiums and reduce investment over the past several years the London P&I Club has decided to grasp the nettle.

In a statement it says it has “taken early and decisive action to strengthen its financial position in light of the parlous state of global investment markets, continuing high claims levels, and the more stringent regulatory capital requirements expected to apply under Solvency II in 2012”.

The Club has been experiencing very high levels of claims since 2006 (most particularly claims on the International Group Pool, of which it has to bear its share) and, from the middle of 2007, the negative impact of the credit crunch on its investments. As a consequence, free reserves fell to just under $81m at February 20, 2008. The Club says that, although capitalisation remains strong at that level, the reserves no longer represent a comfortable margin in excess of regulatory requirements.

It explains, “As the current year has developed, it has become obvious that investment performance cannot be expected to lead to free reserves being brought back up to a comfortable level in the foreseeable future. Indeed, the investment environment has worsened recently, with no prospect of an early respite. Nor is there any persuasive indication that the high level of claims experienced over the last two years will moderate sufficiently to help improve the level of reserves. Furthermore, it is clear that the substantial subsidy of investment income, used to reduce premium levels for many years now, cannot be relied upon in the foreseeable future.”

The only good news for club members is that the 2005/2006 policy year has “developed satisfactorily and will be closed without further call."

After that the least bad news for owners is that for 2009/2010 there will be a general Increase of 15% with an estimated deferred call for 2009/2010 of 40% of the advance call. For the still open 2006/2007 year, however an additional call will be payable at 35% of the estimated total cost (ETC) for the year. The same will apply in 2007/2008 while for 2008/09 additional call will be 25% of the ETC.

The club says: “This conclusion has not been reached lightly and the [club's executive] committee recognises how unwelcome the decisions will be to members. However, it feels that in the current environment, it would be wise to take early and substantial action so as to reduce as much as is reasonable the risk of having to take further action as events unfold.”

The news from London Club follows that from Britannia, which last year sought the highest renewal increase of all the International Group clubs last year, of a relatively modest 12.5%.

However members may have to pay additional amounts to cover the International Group’s excess of loss reinsurance programme. The issue of preserving mutuals’ capital in a post-credit crunch world and the future of P&I clubs generally will come under the spotlight at the forthcoming Tensions in Marine Insurance event which takes place in London 9-10 December.

Shipping accountant and consultant Moore Stephens says the latest guidance from the Financial Services Authority on the Solvency II regime contains some new and challenging tasks for the UK insurance industry. It warns that the governance arrangements in some sectors of the business may not be capable of reacting to external events such as the current credit crunch, and may therefore not comply with Solvency II requirements.

Simon Gallagher, head of the Moore Stephens Industry Group, says, “Some aspects of the requirements relating to Solvency II are really very demanding, and new to the insurance industry. Some firms may struggle, without professional help, to bridge the gap between their current levels of preparedness and the requirements, which take effect in October 2012. This may particularly be the case with smaller companies, which are affected in the same way by the requirements as are larger firms.”

The FSA has recently published a discussion paper entitled, ‘Insurance Risk Management – The Path to Solvency II’, which outlines the key challenges which are likely to arise for UK insurers from the implementation of the Solvency II directive. And it warns that, to ensure that the new regime is successfully implemented, it is essential that senior management consider now the implications for their business and start planning immediately.

Mr Gallagher concludes, “The latest FSA guidance on Solvency II should serve to focus the collective mind of the UK insurance industry on the major undertaking needed to comply with the regulations. Although 2012 may seem a long way off at the moment, it may yet come too soon for the unprepared.”

The continuing turbulence in world financial markets is hitting the shipping industry is fuelling a deterioration in labour relations in many of the world's ports, according to mutual delay cover insurer The Strike Club.

The club says the worst financial climate since 1929, is fomenting labour unrest in an increasing number of countries as workers strike in attempts to obtain better pay and conditions. The summer months were peppered with stoppages, says the club, which have not abated at a time when exporters are desperate to meet their Christmas and New Year commitments.

The club cites summer flashpoints in Argentina, New Zealand, India, Bangladesh, Greece, Canada , Brazil and France, Congo and Uruguay.

Bill Milligan, chief executive of the club managers, said: “Shipping trade is slowing in many markets, ships are being operated at reduced speeds to save fuel costs, and the whole industry faces uncertainty. The financial and credit crisis is making the situation worse and clouding future prospects. All this spells industrial unrest.”

Commenting on the current position of the club, Mr Milligan said that it is not immune from the tightening financial restraints, and the effect on the club’s investments and combined fund.

“However,” he added, “the traditionally conservative and prudent investment policy of the club should ensure that the impact of these terribly difficult market conditions will be minimised, although investment returns this year are likely to be lower than average.”

The club's directors have recommended members to maintain a budget for a closing call of 20% in all three classes of insurance it provides.

The Strike Club’s annual report and accounts, just published, shows that during the underwriting year 2007/08 a total of 302 claims were made covering 143 different locations while 98 industrial dispute claims were lodged for incidents at 48 ports in 25 countries.

Delay related incidents accounted for 204 claims and were spread across 106 locations and 51 different countries.

The North of England P&I club has warned its members to ensure their third-party guarantees of charterer performance are legally binding.

In the latest issue of the club’s loss-prevention newsletter Signals Ben Roberts of the club's freight, demurrage and defence department says: “With the global economic slowdown, owners are naturally concerned about protecting their charter income. Many are turning to third-party performance guarantees but - as recent experience has shown - it is vital to ensure these are watertight.”

The club says one of the most common reasons for guarantees being avoided is that they have not been signed by the guarantor or someone lawfully authorised by the guarantor.

“Failure to comply with this requirement of the Statute of Frauds 1677 will almost certainly mean the guarantor’s obligations under the performance guarantee will be unenforceable,” says Mr Roberts.

North of England also cautions that there must also be ‘consideration’ for a guarantee to be legally binding. Usually this is a promise by the owner to enter into the charterparty but, if the guarantee is given after concluding the charterparty, the consideration is ‘past’ and no longer valid.

“Owners should always try to ensure the signed performance guarantee is given before there is a firm fixture,” says Mr Roberts. “However, to avoid this problem, the guarantee may be supported by some other consideration, such as payment of a nominal fee.” The club says guarantors may also avoid their obligations if they have not seen the full and final terms of the charterparty before signing the guarantee, or if they have not consented in writing to any subsequent amendments. Finally, in situations where the owner and charterer agree that the charterer will procure the guarantee, the club warns owners they will have no claim on the proposed guarantor if the charterer fails to get a proper guarantee in place.

“In such situations, owners should ensure the relevant charterparty clause sets out clearly the charterer’s obligations and the consequences of failing to comply,” says Mr Roberts..

Port equipment, premises and liability insurer TT Club says its is strongly recommending that terminal operators urgently review their emergency plans for dealing with high winds and in particular crane tie-down procedures. The club has issued the warning against the background of the continuing hurricane season in the Western hemisphere and recent damaging Pacific windstorms.

Analysis of the TT Club’s claims over a number of years has highlighted that wind damage to quayside cranes is the biggest weather related cost to terminals. Due to their size, profile and location on the quayside, these cranes are particularly susceptible to wind, and care must be taken in the design and operating procedures to protect against the crane being blown over or along the rails.

“This type of incident can result in serious injuries to workers and be very costly in repairs and operational downtime,” notes Laurence Jones, TT Club’s director global risk assessment. However such incidents can be prevented, or at least the collateral damage caused can be restricted by having appropriate procedures and ensuring that they are followed, the club says. Essential elements include: having effective national and local weather forecasting systems and ensuring that operational procedures respond appropriately when sufficient warning is forthcoming. In addition, good practice would dictate that storm pin or tie-down facilities and procedures are invoked. Furthermore, appropriately designed braking systems, which are properly maintained, can significantly help in conditions of sudden wind bursts.

TT Club has produced a Windstorm booklet to assist in developing and implementing procedures to mitigate the effects of severe weather. This booklet is available free of charge to members or at a small cost to non-members. A revised version will be available in early 2009.

Maritime London supporting member John Holland CBE JP DL has retired from the Court of Common Council after 36 years. Aldgate Ward Alderman, Lord Levene, has appointed Maritime London chief executive Doug Barrow as the Ward Deputy.