The recent deaths of four American hostages and capture of a yachting Danish family has drawn attention to the plague of piracy in the Indian Ocean.
But for ship owners, operators and freight brokers, uncontrolled piracy is just another critical problem for the shipping industry, an industry that is slipping further into financial crisis as the rest of the world economy recovers.
“Many owners will run out of cash,” said Montreal shipping broker Trevor Lavender of Summit Maritime Corporation during the Canadian Wheat Board’s GrainWorld conference.
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“The cracks are starting to show.”
The good news for farmers and other bulk commodity shippers is that freight rates are radically lower now than they were a few years ago, when the 2007-08 commodity bubble pushed ocean freight rates to unheard-of levels.
The Baltic Dry Index, a common measure of the price of ocean freight rates, has recently slumped to near the critically low levels seen in the depths of the 2008-09 market crash.
Lavender said that not only are huge fleets of ships looking for cargoes around the world, but large numbers of massive new ships are being launched every month.
In January alone, 36 capesize bulk vessels were added to the world fleet, and that flow of new ships will continue for at least another year.
The new ships being launched today were ordered in the height of the commodity boom, when many investors and shipping companies expected years of good shipping profits ahead of them.
Just as with mortgage lending in the subprime situation, reckless lending to the ship industry led to a massive amount of overbuilding.
“Never before has the scale of gambling in shipping reached the extraordinary heights of the past few years, financed by an abundance of cheap credit and careless equity,” said Lavender.
That easy credit has disappeared, forcing shipping companies to refinance their cheap bank debt with costly bond issues of up to 12.1 percent interest.
Such expensive debt may lead some shippers into financial crisis and bankruptcy.
Atop low freight rates and a huge oversupply of shipping lies the problem of piracy in the Indian Ocean, as Somali pirates harass, attack and chase cargo ships.
The recent events in the Indian Ocean have drawn attention to the problem again, but Lavender said the issue is unlikely to disappear as long as pirates keep getting away with it.
“It is a disease for which the cure options are obvious to all, but the political will to take care of it is insufficient,” said Lavender.
“The countries that participate in controlling these areas spend millions of dollars and with few exceptions, when they capture the pirates, they take away their weapons and let them go.”
Lavender said one of his grain-hauling clients heading for South America had to alter course and flee the African coast when pirates attacked a nearby ship.
