Growing fears for the world economy signal more pain and even bankruptcies among dry bulk ship owners who are getting rock-bottom rates to carry cargoes like coal and now face a glut of new vessels ordered when times were good.
The tougher climate has hit the sector hard this year and confidence is at a record low. Korea Line, South Korea's debt-stricken second largest dry bulk shipping line, is among the casualties. The firm, under court receivership, has filed a restructuring plan to the court. While cheaper rates could benefit buyers of commodities, the weak economic prospects are set to hit more ship owners. "Smaller companies tend to have less access to capital, especially in weak markets. High financial leverage and weak earnings could force covenant breaches or defaults in the sector," Deutsche Bank analyst Justin Yagerman said.
"A recession or recession like situation will actually prolong the period with poor freight markets," said Sverre Svenning, a director with broker Fearnley Consultants."In normal circumstances, governments - especially in Europe - would try and stimulate the economy through infrastructure and construction work but there is no government in Europe that has money for that now and the US government definitely does not have money."
Investors worry that fiscal cutbacks due to Western credit softness and stagnating output are holding back global recovery.Weak US services sector data and poor manufacturing data this week have compounded the fragile outlook.
Former US Treasury Secretary Lawrence Summers wrote in a Reuters column this week that there is a one in three chance of a US recession.
"If there were to be a double dip recession in both the US and Europe, then it would feel like the mother of all recessions for the dry bulk market," said Khalid Hashim, managing director of the Thai-listed group Precious Shipping .
"It would probably take us to the bad old days of the mid 1980s when the BDI was barely above its all-time low of 557 points." Khalid said that in such tougher economic conditions, he would not be surprised to see the BDI fall below the 1,000 point level and remain depressed for four to six quarters.
The index was seen by investors in 2008 as an indicator of the global contagion from the financial crisis, highlighting the fall-off in demand for raw materials. During the boom times, the index posted a record high in May 2008 of 11,793 points.
The financial crisis drove it as low as 663 points in December 2008. It reached 1,268 points on Thursday, having hit its lowest in more than three months early this week.
"A further a slowdown from here would be very bad news for the freight market," said Georgi Slavov, head of dry research and structured products at broker ICAP Shipping. "I really hope this is a short lived seasonal slowdown in the West."
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