Shipping Woes: More Than Just Pirates

As Somali pirates hold captive the Sirius Star, a Saudi ship with almost $100 million in oil on board, and Indian, British, Russian, and German ships battle pirates up and down the Gulf of Aden, one might imagine that the battle against piracy (BusinessWeek.com, 11/18/08) is the largest crisis faced by the merchant navy industry.

After all, since January of this year, some 580 crew members have been held hostage, according to data collected by the International Maritime Bureau, and many millions of dollars have been paid in ransom. Insurance rates are up, ships are trying to avoid the Suez Canal (which ships get to via the Gulf of Aden, along the coastlines of Somalia and Yemen), and crews from India to Britain are refusing to board ships that pass through that zone. "This sort of thing can't be shut down immediately," says an aide to Indian President Pratibha Patil, who advises her on naval affairs. India's navy has fought at least three different pirate groups in the last week. "To some extent, the world's navies have to flex their muscles, and that takes time."

But what's missing in the news reports about the modern-day pirates and the political repercussions is a simpler fact: The world's shipping industry is already on its knees and has spent the past six months in a slow-motion collapse kicked off by the . And the pirates, it would seem, are the least of the problem. Just six months ago, despite the fact that the economy in the U.S. was already slowing down, the industry was steaming ahead. As ships of every flag, color, and size were crossing oceans, carrying in their often cavernous cargo bays the essentials of trade—oil, steel, cement, iron ore, and coal—shipping rates worldwide in June hit their highest peak ever. It cost nearly $234,000 a day to rent one of those large capesize vessels, the ones so big that they don't even fit through the Suez Canal.

Last week, you and your friends could have rented one of those ships for a weekend bachelor party and football game for less than $4,000, according to data collected by the London-based Baltic Exchange.

Low Shipping Costs

What happened? And what does it mean for the world economy? Not good news. Let's start with shipping rates. They are the lowest they have been in six years, as measured by a relatively obscure indicator called the Baltic Dry Index. The index, which measures the cost of shipping most commodities other than oil, has been in free fall since the middle of the year, down 93% from its peak of 11,793 in May 2008. As a result, daily rates for chartering a merchant ship are still down by as much as 98% from just six months ago.

With shipping rates so low, the first casualties, not surprisingly, are shippers. Stocks for companies that construct ships and operate container carriers have languished. For instance, Singapore-based Neptune Orient, the largest shipping carrier in Southeast Asia, on Nov. 19 announced it was cutting nearly 1,000 jobs, or 10% of its workforce. All of the lost jobs are in the U.S. and Canada.

Not too many people pay attention to the BDI other than shippers, but economists trying to read the tea leaves of global trade see it as a solid leading indicator of whether the world's economy is headed up or down. There's a good reason for that: A ship leaves from somewhere in the world with a cargo load of iron ore, cement, or coal, heading most likely for China, India, Western Europe, or the Americas; two months later, when the ship finally docks, that cargo gets used for roads, dams, cars, buildings, airplanes, anything that generates economic activity. As global trade hums along, the index gains, because the number of ships in the world is pretty steady at about 22,000, so increasing demand increases shipping costs.