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Global Trade Grinds To A Crawl

At the start of this month, those who contend that depression-level readings on the Baltic Dry are no longer very meaningful because at this juncture, the index simply shows the extent to which the industry is oversupplied got a rude awakening when the CEO of the company (Maersk) that handles nearly a fifth of global seaborne freight decided to ruin everyone’s day by daring to suggest that in fact, global growth is rather abysmal and will likely continue to depress demand the world over. Worse, Skou went as far as saying that the days of 10% container growth for his industry are probably gone forever and yet despite it all, he’s buying more ships in what FT says is an effort to “help the company maintain its market leadership position,” which is of course just a nice way of saying that now many be a good time to eliminate the competition. As an aside, Skou also didn’t seem to share Richard Fisher’s assessment of the US as an “epicenter” of growth, saying America was “good but not great,” suggesting that as Rick Santelli told Fisher, it’s easy to score at the upper end of the range on a scale of 1-10 when a “1” basically equates to a deflationary death spiral and “10” just means something akin to not-collapsing. 

Here’s how we summed up the situation at the time: 

And yet the biggest paradox, or perhaps most logical outcome, of all this is that just as margins are about to be squeezed across the entire global supply chain, the healthier companies are now rushing to do what the oil driller are doing, and overproduce, in the process pushing prices even lower in hopes of putting marginal companies, and those which don't have access to cheap and easy funds, out of business. Call it the Amazon effect, only here one is dealing with net debt leverage of 3x, 4x or higher.

 

So with global demand lower as a result of slowing trade, and with Maersk about to boost ship supply even more, the result will be an even more aggressive drop in cargo and haulage prices as the deflationary wave hits yet another industry, in the process forcing seaborne transportation to be the latest to succumb to deflation, which for the highly levered sector means even more defaults are imminent now that China no longer is pumping nearly $4 trilion in total new credit every year. 

Today, we got still more evidence from the world of seaborne freight that in fact, global trade may be grinding to a halt. As Reuters notes, freight rates declined for a seventh straight week plunging double-digits to the lowest levels in nearly 2 years: 

Shipping freight rates for transporting containers from ports in Asia to Northern Europe fell 12.4 percent to $620 per 20-foot container (TEU) in the week ended on Friday, a source with access to data from the Shanghai Containerized Freight Index told Reuters.

 

It was the seventh consecutive week with falling freight rates on the world's busiest trade route and the current level is the lowest seen since June 2013.

 

In the week to Friday, container freight rates dropped 15.5 percent from Asia to ports in the Mediterranean, and fell 4.7 percent to ports on the U.S. West Coast and were down 4.7 percent to ports on the U.S. East Coast.

And while there are still plenty of commentators who will suggest that oversupply is the controlling factor here, the evidence just seems to be mounting that it could be the other way around or as we put it: “...yes supply isn't helping, but it is the lack of global demand that is pushing equilibrium levels lower, aka global deflation.”

Meanwhile, shippers seem to suffer from the same disposition which Chinese regulators warned today may end up generating huge losses for investors, for, as The Economist puts it, “owners are habitually more worried about missing out on an upturn than they are about getting caught by a downturn.”

On that note, we’ll leave you with the following bit of advice from the China Securities Regulatory Commission which seems applicable here: 

“We shouldn’t be thinking if we don’t buy now, we will miss it.”