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Wednesday, October 15, 2008

Credit Crunch: Baltic Dry

“Letters of credit and the credit lines for trade currently are frozen. Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.” -Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company

Yesterday in Baltic Dry, Amazing Plunge, I marveled at the absolute collapse of the index and also thought that there was no way demand for dry commodities had dropped so significantly so quickly.

The real story is that credit has dried up and letters of credit aren’t being honored so the stuff quite simply isn’t shipped. This has caused shipping rates as measured by the index to cliff dive.

There is a very real risk that various economies will start to face stresses in this time of ‘Just In Time Delivery’ as very small stock piles vital commodities quickly get vacuumed up by normal industrial demand.

The credit crunch is everywhere...

Watch the Baltic Dry Index for signs of life. This will help determine if and when the credit freeze starts to thaw.

Shipping Lines Say Tight Credit Cutting World Trade (Update2): “Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a "big issue'' for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodities-shipping costs. About 90 percent of world trade moves by sea.

"This can have a significant effect on demand because you won't see the same volume of cargo moved,'' Harold L. Malone III, senior vice president at Jefferies & Co., said at a Marine Money conference in Singapore. "You have to figure out other ways to get trade done.''

The Baltic Dry Index dropped 8.5 percent to 1,809 points yesterday, the lowest since August 2005. Pacific Basin dropped 6.5 percent to HK$4.75 in Hong Kong and Precious Shipping declined 5.5 percent to 12.1 baht in Bangkok.”

List of Water Transportation Companies:



Anonymous said...

Shipping credit is the oldest form of credit.
What's a "credit crisis" if there had not been an effect on Letters of Credit?
"Credit", from the Latin root for "to believe", as in "credulous".
A crisis of trust, caused by some very high profile, high powered lying over the past 8 years or so.
'Backed by the full faith and credit of the USA', indeed.

Anonymous said...

If stuff is just not going to be shipped, then people are going to starve. Won't this wreak further havoc on world markets?

Anonymous said...

The Federal Reserve is Guilty of Helping Create the Global Financial Meltdown

Many investors and concerned citizens around the world are showing their outrage at what the Federal Reserve has done to the American economy with their easy money policies which caused the credit & real estate bubble and subsequent global financial meltdown.

Join the thousands who are signing & commenting on the Abolish the Federal Reserve Petition at

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Nick von Mises said...

I actually stockpiled two weeks worth of essentials the moment this LOC issue hit the blogs. First time I've ever done so.

My friends think I'm a loon preparing for the Zombie Apocalypse but I think its more like a Katrina situation of sudden (and short-lived) dislocation causing madness until order is restored.

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