[Cid_Yama]

I have been more than a tad concerned about near-paralysis in the money markets and imploding equity prices. But this e-mail, from a well connected international investor not prone to alarm or (normally) the use of capital letters says that the banking crisis is bringing international shipping to a halt.

By way of background, letters of credit of various sorts are essential for trade. For instance, imagine the difficulty if you are, say, a Chinese manufacturer who wants to sell his wares to buyers overseas. How can he be sure the goods he ships will ever be paid for? Imagine the considerable difficulty and cost of chasing a deadbeat in a foreign country. Letters of credit. issued by banks, assure payment. They can also serve to finance the shipment (ie, fund the inventory while it is in transit).

Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks. From the above-mentioned reader:

At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, <b>which means that within the next 2 weeks, physical shortages of commodities begins to show up</b>. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.

We spoke later in the evening and said he had heard of another instance of a trade transaction failing, different parties entirely, this a shipment of coal, again due to the unwillingness of the seller's bank to accept an LC from the buyer.

Update 12:10 AM: Confirmation comes from the Financial Post, "Grain piles up in ports" (hat tip reader Vox Sanus):

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."
link

[Quinny]

I've been worried about this as well. Shipping stocks falling, even with Oil prices falling, and the cost of transport dropping, who's gonna want to ship food when they can't trust the LC.

[IslandCrow]

One lesson that was taught us when I lived in a developing country, was that if a shop had goods in that you wanted you bought it straight away (no waiting to think about it and come back next week), as there was no guarantee that they could/would reorder it when the stock was sold.

Good bye JIT, you spoiled us for choice.

[Snowrunner]

I still see lots of ships in Vancouver (my office overlooks one of the ports, including containers that get "stacked" right under my window before making their way eastwards, but considering that usually these things are six months out I am not going to be surprised if / when I see fewer and fewer ships coming in / trains to be build.

Some words come to mind that aren't fit to print here.

[MrBill]

My wife is a banker and does trade finance.
$this->bbcode_second_pass_quote('', '[')b]Trade finance booms amid global crisis

Business is booming in the trade finance market as exporters and importers return to a tried and tested form of credit amid the chaos of the financial crisis, bankers in the sector say.
Demand for trade finance -- a traditional form of banking dating back to the Middle Ages -- is so strong that some houses say they are turning away business for lack of capacity.
But if volumes are up, so is the price, with deals currently offered at 300 basis points over interbank refinancing rates, three times or more the going rate a year ago.
And that is now making it hard for developing countries to finance their exports, with Brazil sounding the alarm. Some bankers also fear the high prices could eventually see new business dry up.
"This has been a phenomenal year for trade finance," said John MacNamara, Managing Director, Structured Commodity Trade Finance, for Deutsche Bank in Amsterdam.
"They've been going on apace, if anything with far better quality counterparties, if only because they couldn't go to other sources," he told Reuters.
For instance in 2007 Deutsche acted as agent on $2 billion of pre-export finance and borrowing base deals. So far this year the figure is $16 billion.
And some of those deals are very big. Deutsche has recently been involved in several over $1 billion, including three with large Russian corporates in the metals and oil sectors that were bigger than $3 billion.

SIMPLE AND TRANSPARENT
Trade finance is the easiest, cheapest and most collateralised form of credit, industry experts say.
In recent years customers were lured away by investment banks and corporate finance departments offering sophisticated products, but now they are flooding back attracted by the simplicity and transparency of trade finance.
International trade amounts to about $14 trillion, World Trade Organisation figures show, and 90 percent of these transactions involve credit.
Trade finance takes various forms. An importer's bank can issue a letter of credit to an exporter, which it pays when it receives documents confirming the goods have been shipped.
In another variant an exporter sells its receivables -- or future payments from an importer -- at a discount to a trade house known as a forfaiter.
There is also a secondary market in trade finance instruments but activity there is subdued in the general nervousness around the crisis, bankers say.
Around 60 percent of trade finance is handled by private lenders, ranging from niche boutiques to major banks. These are typically short-term transactions of less than a year, but increasingly these players are lending for five years or more.
Export credit agencies, who concentrate on this longer-term business and are often state-run, handle about 30 percent, and the rest is handled by regional development banks.
"In difficult times, trade finance shows itself to be a tried and tested method of financing," said Kimberly Wiehl, secretary-general of the Berne Union, which groups state and private-sector export credit and investment insurance agencies.
"The trend has been a steady increase in demand, not a huge increase given all the turmoil in September," she told Reuters.
Short-term commitments by Berne Union members rose to $1.02 trillion at the end of June from $901.8 billion at the end of December and $787.9 billion in June 2007, she said.
But against that 29 percent rise over the year, claims for deals that defaulted totalled only $530 million in the first half of this year against $1.0 billion in all of 2007, typical for this stage of the export credit cycle.

WARNING SIGNS
Trade experts say it is still too early to say how the financial turmoil will play out on underlying trade flows. So far these numbers suggest that exporters and importers can get credit when they need it and can meet their liabilities.
This contrasts with the 1997/98 Asia financial crisis, when there was a total interruption of financial transactions for a while in some countries, including trade finance.
"In the Asian crisis for some weeks ships couldn't leave the ports. We're not seeing anything like that," said one expert.
But there are warning signs. On Monday Brazil's government announced it would use its foreign reserves to increase credit lines for exporters who have been finding it increasingly difficult to get finance for trade.
"They were becoming expensive, but many exporters weren't able to find finance at any price," said Paolo Estivallet de Mesquita, a senior diplomat at Brazil's WTO mission.
"There's liquidity access for traditional cross-border transactions," asid Sal Chiappinelli, general secretary of the International Forfaiting Association.
Chiappinelli's own firm, SFC Swiss Forfaiting Co Ltd, which is backed by private equity investors, has seen business grow by 150 percent this year, including deals with Russia and Belarus.
"We deal with reality. We don't sell dreams in our activity," Chiappinelli told Reuters. "It's very transparent. We know who we give money to. We know who the borrower is."
Forfaiting finances about 2 percent of world trade.

HIGHER PRICES
But as Brazilian exporters have discovered, the price of finance has gone up. In recent weeks the price they paid has gone up from 4.5 percent to 15 percent -- and for some has disappeared altogether.
By this summer deals generally were paying 125-180 basis points over the Libor interbank dollar rate, against 50 basis points a year earlier, said one banker. In the last two weeks everything has been over 200 basis points, he added.
But he said he had recently turned down a deal for a big Russian steelmaker paying a spread of 300 basis points.
"It wasn't their creditworthiness, we just don't have the capacity," he said.
But it's not all good news for players in trade finance. They may be having a banner year, but the crisis means that bank managements are cutting back bonus payments.
And some worry the good times are about to stop.
"Trade financing in which international banks play an important role may gradually slow unless or until the current difficulties are overcome," said one trade finance expert who asked not to be identified.

[Quinny]

But doesn't this still rely on the Banks trusting each other?

[MrBill]

$this->bbcode_second_pass_quote('Quinny', 'B')ut doesn't this still rely on the Banks trusting each other?

[Cid_Yama]

Check out the Baltic Dry index (also the Capesize)

http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY:IND

http://www.bloomberg.com/apps/cbuilder?ticker1=BCIY:IND

What these mean:

http://en.wikipedia.org/wiki/Baltic_Dry_Index

http://en.wikipedia.org/wiki/Capesize

Today's market (page down on left)

http://en.stockq.org/

[Cid_Yama]

<b>Brokers stunned by 'zero dollars per day' deal</b>

UNCONFIRMED reports that a panamax was fixed for a voyage that covered bunkers and port costs only stunned London brokers today, as bulk carrier charter rates continued their month-long freefall.

The fixture, yet to be verified by the Baltic Exchange, was thought to be for a 1981-built panamax coming out of the Middle East Gulf for a journey via the west coast of India, to take a cargo of iron ore to China.

Although reports denying the deal had taken place were circulated today, brokers continued to point to the fixture being for the Hong Kong-flagged, 61,393 dwt, 1981-built Dong Sheng Ocean. There were also further rumours that a supramax bulk carrier had fixed out of India on similar terms, although brokers could not verify the details of either fixture.

This would result in the owners having to cover the costs to ballast to a better position.

But following a shortage of cargoes out of India to China over the last few months, another broker said he would not be surprised if the fixtures were real, even joking that the owner was lucky to get the bunkers paid.

He added that even modern panamaxes have been forced to sail in ballast away from India to either Indonesia, South Africa or even South America to find a cargo.

The deal, if genuine, represents an amazing turnaround for panamax charter rates, which have plunged from over $50,000 per day in late August to languish at just over $16,000 per day.

The charter arrangement for the elderly vessel represents an effective rate of “zero dollars per day” and plunges the industry back to its darkest times in the early to mid 1980s.
link

They are actually shipping at a lost to get to another port where they might find a load for profit.

[MrBill]

It is fixed versus variable costs. The vessel will sail so long as its variable costs are covered. Fixed costs like depreciation, replacement and cost of capital will be ignored in the short-run. It is no different than a semi doing a dead head or an empty railcar in search of a cargo.

[TheDude]

Ship Finance to Drop by Third on Financial Turmoil (Update3)

$this->bbcode_second_pass_quote('', 'B')y Alaric Nightingale and Maher Chmaytelli

Oct. 9 (Bloomberg) -- Loans to shipowners will drop by at least a third this year as frozen money markets curtail banks' ability to raise funds and shipping prices tumble, according to the largest lender to the industry last year.

Banks will provide as much as $100 billion to shipowners this year, down from $150 billion in 2007, Ulf B. Andersson, head of shipping at Nordea Bank Finland Plc, told a Marine Money conference in Athens today. Funding costs have increased to 1 percentage point above the London Interbank Offered Rate, or Libor, he said, without giving a figure for last year.

``We are in a vicious circle of financial turmoil affecting consumption and slowing down economies,'' Guy Verberne, economic research chief at Fortis Bank, said in an interview in the city. ``We have to sit it out and wait for the dust to settle.''

The shipping industry needs about $300 billion over the next three to four years to fund construction of vessels that are already on order, Andersson said. The cost of hiring ships to haul coal, ore and grains fell by record amounts last month. Container ships are also being idled because of slumping U.S. demand for goods, Lloyd's List reported today.

[Gorm]

this adds an enormous pressure on leaders of all sorts to do something. I am worried.

somebody do something!

[MrBill]

I think the world's leaders have been doing a great deal, but the questions are is it working? Can it work? How long will it take? And will their actions cause even more problems down the road?

[davep]

In my considered opinion, WE'RE DOOMED!!!11!

[Concerned]

$this->bbcode_second_pass_quote('MrBill', 'I') think the world's leaders have been doing a great deal, but the questions are is it working? Can it work? How long will it take? And will their actions cause even more problems down the road?

[IslandCrow]

How long (in terms of time) are some of the supply chains?

As I was driving home from a work trip earlier in the week I passed (they were going the other way) something like 20 car-transporters loaded with SUVs going to Russia. I see news of that market slowing down so I wondered how long it takes for the items in the 'shipping pipeline' to clear.

[pup55]

$this->bbcode_second_pass_quote('', '3')00 basis points over interbank refinancing rates,

[Cid_Yama]

<b>Baltic Dry Index Has Record Drop as Credit Freeze Cuts Demand</b>

The Baltic Dry Index, a measure of shipping costs for commodities, had its biggest drop on record as a credit freeze weakened demand for commodities.

The index tracking transport costs on international trade routes retreated 282 points, or 11 percent, to 2,221 points, according to the Baltic Exchange in London. Bloomberg data on the index go back to January 1985. It has dropped 55 percent over the past three weeks.

"There has been an acute and significant decrease in near-term demand for shipping capacity,'' Jon Windham, a Macquarie Bank Ltd. analyst in Hong Kong, said in a report dated yesterday. "The primary cause is a significant fall off in general demand driven largely by companies' fears to extend cash.''
link

[Tanada]

$this->bbcode_second_pass_quote('IslandCrow', 'H')ow long (in terms of time) are some of the supply chains?

As I was driving home from a work trip earlier in the week I passed (they were going the other way) something like 20 car-transporters loaded with SUVs going to Russia. I see news of that market slowing down so I wondered how long it takes for the items in the 'shipping pipeline' to clear.

[IslandCrow]

A couple of weeks ago I wondered here who long it would be until transport of cars to Russia would tank. Today's online report in one paper has the following:

$this->bbcode_second_pass_quote('', 'A')ccording to estimates made by Finnish Customs, a total of 350 truckloads of cars will leave the Port of Kotka for Russia this week. In comparison, in the current year the average number of cars shipped eastwards through Finland in transito traffic has been more than 200 truckloads a day.