|Leo Lewis, Asia Business Correspondent|
They are anchored silently across the straits, stretching as far as the eye can see from Singapore's gleaming skyscrapers, and they are a stark illustration of the worst threat to business that veterans of the shipping industry have ever seen. Ships, immobile on the horizon, going nowhere. For an economy such as Singapore, it is the stuff of nightmares.
According to senior industry figures, the complex network of trade credit that keeps imports and exports rolling through Asia and beyond has evaporated — suddenly — in a haze of mistrust. And as a result, cargoes are sitting on docksides throughout Asia without the letters of credit that would load them on to ships, which, in turn must sit and wait.
As the extent of the crisis has unfolded, the Baltic Dry Index (BDI) of shipping rates for materials such as iron ore and coal has plunged by nearly 90 per cent over the past few weeks. Economists have pointed to the fall as a clear indication that the financial crisis has been passed through to the real economy.
A sales manager at one prominent London shipbroker told The Times that the prospects for container rates over the coming year “look far worse than the bulk rates”. The spectacular crash has been driven in part by falling demand for commodities, but many believe that problems of trade financing will hold prices down until well into 2009.
Khalid Hashim, the chief executive of Precious Shipping and a 30-year veteran of the industry, believes that the collapse in the BDI should be understood principally as an effect of the trade finance crisis. Normally, when a seller and buyer of a commodity conduct a transaction, the seller opens a letter of credit to the buyer, allowing the buyer to ship the goods and en-cash the money. The system breaks down when the letter of credit from the bank is not being honoured, as is the case now.
“This is when trust in the trade evaporates,” Mr Hashim told a recent conference call organised by JPMorgan. “This type of trust in the trade has gone out of the window and people within trade circles have confirmed that major banks are refusing to honour the documents they have issued because they don't have the money.
“Those on the front line of world trade have already experienced this. They know that today, to move cargo, they'd better have a secure instrument for payment, otherwise they will ship the cargoes, lose control of them and not have the money.”
Worst hit, analysts say, will be economies such as Hong Kong, Taiwan and Singapore, which sit at the centre of Asia's production chain and depend on the movement of “processing exports” — components, half-finished goods and raw materials.
That flow, senior executives of Japanese shipping companies argue, could take months to return to something approaching normal.
One leading industry source told investors at a recent conference in Singapore to expect grim times, with a “horror story” set to play out next year as ships ordered several years ago join idle fleets and consumers hold on to their money. “Do you know anyone even thinking about buying a new car or even a flat screen TV? Until you do, the situation in shipping is not going to improve.”
Anecdotal evidence from Yokohama in Japan suggests that commodity price volatility has also played a huge role in the present deadlock: shipments are ordered but in the time it takes to get the vessel to the load port and then to the final destination, the spot price of the goods aboard could have fallen so sharply that the entire journey is loss-making. The impact of the trade financing predicament could be especially severe in China. Processing exports account for 46 per cent of the country's total.
For their part, Singapore wags are saying that if the build-up of idle vessels offshore gets much worse, it will soon be possible to walk across them to Indonesia.
[originally posted here: siliconinvestor.com