Shipping - the global economy's enabler - Business Works

Shipping – the global economy’s enabler

Jeremy Penn

Jeremy Penn, Chief Executive of the Baltic Exchange in London, looks at the importance of the shipping industry to the global economy and how the Exchange’s services match the needs of an increasingly-sophisticated freight market.

The global economy is critically dependent on the international merchant fleet of bulk carriers and tankers to keep vital bulk commodities moving swiftly, safely and efficiently. The London-headquartered Baltic Exchange and its shipbroking, shipowning and chartering member companies from around the world are at the heart of this business.

Nord Princess - Handysize vessel

Over 90% of world trade is carried by the international shipping industry. Without shipping the import and export of goods on the scale necessary for the modern world would not be possible. Thanks to the growing efficiency of shipping as a mode of transport and increased economic liberalisation, the prospects for the industry's further growth continue to be strong. There are around 50,000 merchant ships trading internationally, transporting every kind of cargo. The world fleet is registered in over 150 nations, and manned by over a million seafarers of virtually every nationality.

Today, most of the world’s ships are built in the East, crewed by sailors from developing nations and over half are owned by Greek, Japanese, Norwegian, German and Chinese interests. However, the UK remains a leader in the provision of professional services to this huge business providing legal, insurance, banking, engineering and chartering assistance to the world. London remains the capital of the global shipping industry with more maritime related companies based here than any other location in the world. These contribute over £1bn in annual overseas earnings to the UK economy.

Main vessel types

Container ships carry most of the world's manufactured goods and products, usually through scheduled liner services. The equivalent of about 141 million loaded twenty-foot containers moved across the oceans in 2007.

  • Bulk carriers are the work horses of the fleet and transport raw “dry bulk” materials such as iron ore, grain and coal. They are identifiable by the hatches raised above deck level which cover the large cargo holds.
  • Tankers transport “wet” cargoes such as crude oil, chemicals and petroleum products. Tankers can appear similar to bulk carriers, but the deck is flush and covered by oil pipelines and vents.

The sector has benefited hugely from the complex process of globalisation, which is driving an era of unparalleled industrial expansion and an unprecedented growth in world trade. According to the latest figures from the United Nations, over 7 billion tonnes of trade were moved by sea in 2007. As the interrelationship of national and regional economies deepens, so the need for efficient and productive shipping increases.

Since the 1960s the shipping industry has enhanced the growth of world trade by providing adequate tonnage at affordable prices. Containerships, bulk carriers and tankers have consistently served the cause of world trade handsomely, carrying everything from coal, iron ore and finished goods to oil. Not only has the cargo carrying capacity of the fleet increased, but the world’s ships and ports have become both larger and more efficient.

Coal and grab

But in the past five years the rapid expansion of the global economy, fuelled by a seemingly insatiable hunger for raw materials to produce goods, has seen the pendulum swing in favour of shipowners and the cost of ocean transportation rise spectacularly, especially in the dry bulk market. The continued expansion of the Chinese and Indian economies in particular, has seen the soaring demand for steel and raw materials soak up vessel capacity. The Baltic Exchange Dry Index, a key indicator of the dry bulk freight market, peaked at an all time high in June 2008.

The cost of freight, like any commodity, is dictated by the rules of supply and demand. For many years the capacity of the shipping fleet has consistently exceeded total demand. The ready availability of ships at low cost has been taken for granted by oil majors, energy producers, factories and governments alike. However, since 2003, rapid economic growth has outstripped the number of ships capable of meeting demand.

While sharply increased cargo volume is the underlying factor driving freight rate movements, it does not quite paint the full picture.

Shipping is a market driven by the supply-demand equation, as well as good old market sentiment. Add factors such as weather, environmental and safety legislation and port delays and we have a trading environment susceptible to huge freight rate rises and falls.

« a trading environment susceptible to huge freight rate rises and falls »

On the shore, major ports in Australia, Brazil and China in particular have become increasingly congested, creating delays and adding to vessel hire costs. At sea, the runaway cost of oil has added to vessel fuel costs and a growing shortage of qualified seafarers is having an impact on running costs.

Whilst shipowners have responded to increased vessel demand by ordering new vessels, building a ship does not happen overnight. Korean, Japanese and Chinese shipyards are working at full capacity – indeed, some Chinese shipyards not even constructed are already slated to build about a fifth of the ships on order worldwide - most new ships will only be delivered in 2010. What impact these deliveries will have on the market remains to be seen, but freight rate volatility looks set to remain a feature for the foreseeable future. For companies which are responsible for moving millions of tonnes of cargo every year, freight has become a multi-million dollar financial risk which needs to be managed.

Nordpol - Panamax vessel

The cost of freight has become increasingly volatile with the daily cost of hiring the biggest bulk cargo carriers moving up and down by tens of thousands of dollars over very short periods. Since 2003 we have seen daily hire rates for Capesize vessels (which are around 170,000 tonnes capacity) fluctuate between US$25,000 and US$300,000 and indeed drop by nearly US$33,000 in one day alone in June. For a market traditionally more used to seeing much smaller movements over longer periods of time, this has raised a new set of problems for the users and suppliers of shipping services. With the value of the freight at times outstripping the value of the commodity, freight has become a risk which commodity traders need to factor into their transactions.

The management of freight rate volatility continues to cause headaches in boardrooms around the world, whether it is the shipping company unsure of future earnings or the charterer worried about the huge financial implications of future freight bills. Whilst future freight rate uncertainty is not a new phenomenon, the level of volatility is a relatively new development.

To help offset this risk and indeed to trade it, the shipping markets have become more sophisticated and are increasingly turning to derivative-based products. More attention than ever before has been placed on Baltic Exchange shipping market indicators which cover daily vessel hire rates or cost per tonne of cargo on over 50 key wet and dry routes, as well as forward prices and the assessments on various vessel types’ second hand and demolition prices.

Prior to the launch of the Baltic Exchange freight market indices, trading derivatives in the shipping markets would have been impossible.

Baltic BDI Index

Shipping is by its very nature a non-standardised commodity. Every ship is different, every port different and every voyage subject to a huge variety of risk factors. Until relatively recently shipowners and charterers looking to reduce their exposure to freight rate volatility traditionally relied on a strategy of lengthy contracts d’affretment, time charters and spot market activity.

Whilst these tactics still fundamentally characterise the shipping markets, new trading strategies have also emerged based on financial and commodity market models. Many companies now use Forward Freight Agreements (FFAs), which enable particular routes or vessel types to be hedged or traded.

The assessments published by the Baltic Exchange are used to settle freight derivative trades. The market has grown year-on-year and is now worth over US$100bn annually. The trading of freight derivatives has not been restricted to shipping and chartering companies, but also a growing band of investment banks and hedge funds looking to make profits by speculating on future freight movements.

The Baltic Exchange relies on a panel of international shipbrokers in major shipping centres across the world to provide it with daily professional and independent assessments on freight rates on key shipping routes. The Baltic has been publishing this type of information since 1985 and it is followed keenly by not only by the shipping markets, but also by economists and journalists who use it as a bell weather for the health of the global economy.

The Baltic Exchange has existed in various guises since the early part of the 18th century, first as an informal coffee house, through times when it operated a large and very active trading floor. Today most trading takes place electronically and now the Baltic is the provider of a set of globally-recognised independent freight market assessments. It will continue to evolve as the shipping markets evolve.

Shipping and the environment

Shipping is the least environmentally damaging form of commercial transport. Despite a massive increase in world seaborne trade, there has been a substantial reduction in marine pollution over the last 15 years, especially with regard to the amount of oil spilled into the sea.

Comparison of CO2 emissions by different transport modes:

Mode of transport CO2 (g/tonne km)
Airfreight (747-400) – 1200 km flight 540
Heavy truck with trailer 50
Cargo vessel (over 8,000 dwt) 15
Source: NTM (Swedish Network for Transport and the Environment)

For further information about the Baltic Exchange, please visit

  • Handysize tanker vessel NORD PRINCESS 38,554 dwt, built 2006 (Photo: NORDEN)
  • Coal and Grab (Photo: Dennis Schnell, Bulldog and Partners)
  • Panamax dry cargo vessel NORDPOL 77,229 dwt, built 2002 (Photo: NORDEN)

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