Your Reading List

Ocean trade choked as credit notes dry up

There is growing evidence the global credit crisis is stifling seaborne trade as banks become more reluctant to honour crucial letters of credit between buyers and sellers who ship goods and resources, analysts say.

“With reports of sellers’ banks deciding they don’t trust the financial institutions named in buyers’ letters of credit, have come alarming anecdotes of cargo ships being stuck in home ports,” Matt Robinson, an economist at Moody’s Economy.com,said.

“With ships not moving, stocks have been piling up and exporters have grown desperate for income from idle inventory,” Sydneybased Robinson said in a report published Oct. 22.

In the Moody’s report, entitled “Crisis of confidence hits global shipping,” Robinson said there was growing anecdotal evidence the financial crisis was hitting the real economy and suffocating trade.

Around 90 per cent of the world’s traded goods by volume, including key raw materials, are shipped by sea.

In the last few months main sea freight indices, barometers of global demand, have been hit by the deepening financial crisis, falling commodity prices and slowing economic growth.

The Baltic Exchange’s Dry sea freight index, a proxy for future demand growth in raw materials except oil, plunged to a six-year low last week from a record hit in May.

Oil tanker freight rates are also softening and core container trade routes that carry finished goods from Asia to the U. S and Europe have been hammered.

“The credit crunch is an issue too,” said Peter Norfolk, director of dry trade at Simpson, Spence and Young ship consultancy in London, giving reasons for the Baltic Index’s collapse.

“Some of these (cargo) bookings are made on letters of credit which people have had difficulty in getting from banks so it’s certainly an issue in the short term,” he said.

A letter of credit is a formal document that greases the wheels of trade by guaranteeing payment by an importer to a third party, usually the producer.

Letters of credit are used extensively in transactions of significant value, such as large tonnages of raw materials.

Robinson said if the crisis worsened, ordinary consumers could be hit as more importers feel the pinch. “Consumers also face potential supply shortages as shipments of foodstuffs and grain lay stranded overseas,” he said.

About the author

Comments

explore

Stories from our other publications