Baltic Dry Index Through The Floor

Every working day, the Baltic Exchange asks brokers around the world on how much it would cost to book various cargoes of raw materials on various routes—150,000 tons of iron ore going from Australia to China or 150,000 tons of coal from South Africa to Japan. Brokers are also asked to consider variables such as the type and speed of the ship and the length of the voyage. Based on the answers, a number is arrived at which represents the shipping costs. Take a bow the Baltic Dry Index.

The BDI was 11,793 on 21st May this year. Yesterday it was 815, posting an incredible decline of 93 percent.

Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100per tonne, or around $15m per voyage. To book the same trip today would cost only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.

As if that wasn't dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 - a fall of nearly 98 per cent.

There are main two problems:

Producers are stuck with huge inventories. Post the collapse of commodity prices, no one is in hurry to build inventories. Also, with production cuts and factory shut downs, existing inventories have become a huge issue.

The credit crisis. No one wants to lend in current market environment. As a result, Letters of credit are not getting issued. They are required to load cargoes for departure at ports.

"You are getting very, very close to the cost of just crewing and running a ship. It can't go much lower than this without owners deciding they don't want their ships employed," said one London-based shipbroker.