The Daily Update - Global Shipping/ Baltic Exchange

One industry that negative rates around the world are having a detrimental effect on is global shipping.  Nils Smedegaard Andersen, the chief executive officer of A.P. Moeller-Maersk A/S, the world’s biggest shipping line operating over 600 vessels, says the current monetary policy of some governments “means that consolidation will be much slower because it’s easy for banks to keep weak shipping companies above water”.

These zombie companies as they are known, continue to operate due to low or zero interest rates, even though they are very close to being insolvent or near bankruptcy. They are propped up by banks to avoid capital losses. As long as they can cover operating costs plus interest payments, banks are continuing to allow them to finance to avoid a fire sale and in the hope that the market will improve at some point in the future.

Clearly this course of action does not help the wider industry in the short term. The policy stops the weaker shipping companies going to the wall, thus increasing the pressure of overcapacity because of the slowdown in global trade. As Andersen points out, this cheap finance has led to “many negative effects” adding “Politicians aren’t making the reforms that are needed and are leaving it to the monetary policy makers to solve the economic problems that many countries face with low competitiveness and low investment levels”.

A reflection of the pressures facing the industry is the Baltic Exchange's main sea freight index. The exchange tracks shipping rates carrying dry bulk commodities. In February this year it hit a record low of 290, falling an eye opening 98% from its peak of nearly 11,800 in May 2008. Even as recently as November 2014 it was trading at nearly 1,500. Since the low point in February, the exchange has rallied, mainly on the back of bounce in commodities since the start of the year. It bounced 67% in April, albeit from that very low starting point. So far this month the exchange has drifted lower, with commodities once again being the main driver, to 631 at Friday’s close.

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