Goldman Sachs reported on Thursday that they expect shipping freight rates worldwide to remain low until at least 2020 due to a glut in ships, lower fuel costs, and a slowing Chinese economy.
Shipping rates have collapsed since their peak in 2008, when the daily rate for a Capesize vessel could be more than $100,000. Today, it is less than $10,000. The Baltic Dry Index, which measures the price of shipping commodities, has fallen from 1327 in November 2014 to a record low of 509 in mid-February. As of May 10, it has risen to 574.
The reasons for this rate collapse are also the reasons why Goldman Sachs expects it to last for some time. China’s economy is no longer growing as fast it once did. Premier Li Keqiang set China’s expansion target in March to 7 percent, the weakest pace in 15 years. Furthermore, Keqiang has admitted that “it won’t be easy to achieve another 7% growth this year” to The Financial Times.
Less growth means less demand for iron ore and coal, some of the biggest money makers for the shipping industry. For example, Goldman cited slumping rates in hauling iron ore from Western Australia to China. The price for using shipping containers for one ton of ore has fallen from $44 in 2008 to $4.40.
China’s growth is expected to slow down as the country becomes ever richer. Therfore, shipping rates cannot count on high growth rates once again. Demand for iron ore and coal will continue to decline as China looks to transition from coal to cleaner energy production methods.
While the lower demand for iron and coal will hurt iron and coal producers, lower shipping rates will help large producers seek new markets. Scrap yards can also look forward to record business as shipping companies will scrap older, less productive ships.
But while the shipping industry will stabilize when they eliminate enough ships, newer ships commissioned in 2012 or earlier are finally entering service. The process of destruction and creation plans to throw yet another wrench in the struggling shipping industry.