What is the exposure of banks to the dry cargo shipping market? I do not know the answer but what I know for sure based on previous work in this area is that the collapse in the Baltic Freight Index is more due to a glut of newbuilds coming out of Asian yards than due to a slow Chinese economy. Certainly, falling demand from China is putting a downward pressure on rates but the major cause of this is the oversupply of ships. Could a collapse in freight rates trigger another banking crisis?
Back in February when the Baltic Dry Index hit a low of 647 I gave a brief overview of the mechanics that bring equilibrium to prices. Freight rates have the biggest impact on ship prices. If rates stay low for an extended period of time, some shipping firms may not be able to meet their obligations and will default. The banks will not be able to recover after scrapping more than 10% – 20% of the loan value. This could be a major problem for banks with a large portfolio of loans in this area.
It may be seen from the BDI chart above that the drop in rates during the last two years has been spectacular, a loss of close to 85%. This is not a usual decline. This shows that in this area there are many speculators and some greedy bankers who give loans to anyone who calls himself an operator of vessels at the peak of the market just to make a commission.
Of course, there are also serious companies with management that understands this market well and they have secured long-term time charter contracts so that they can have a steady cash flow to meet their obligations in a difficult market. Companies that are stuck in the spot market will be in trouble if rates continue to stay at these levels.
