Thursday evenings in the City could be pretty raucous, bottled beers (an upmarket novelty in the early 1980s) bought by the crate and of course, a glass of dry white wine for the lady. But what's interesting is that the shipping industry still relies very heavily on brokers.
Tables, tallies, locations, and prices of cargo ships and their loads have been kept for centuries, in Britain centring on the Baltic Exchange in St Mary Axe, London EC3. Bombed by the IRA in 1992 trading moved temporarily to the Lloyd's of London building until new premises were built down the road in 1995; the skyscraper affectionately known as 'the gherkin' now stands on the old site.
The exchange publishes on a daily basis a series of shipping indices. Each of these is built up from a number of components which are benchmark rates for individual international shipping routes. There are in total 30 routes covered in the dry bulk market and 31 routes covered in the tanker markets. In addition the Baltic compiles and publishes forward curve rates for the freight derivatives (Forward Freight Agreement) plus option volatilities for the purpose of margin calls. In addition it produces a series of weekly benchmark prices for the sale and purchase of ships and for ship recycling; there are 6 reference prices for these.
Ships come in all shapes and sizes, grouped into categories. Very large crude carriers (VLCC) are the preferred method of moving oil, slowly to conserve energy, mainly from the Middle East to Asia or Europe. New routes are however being developed, Singapore Straits to Western Europe for diesel, Texas to Rotterdam for shale oil. Note that when US legislation insisting on double-hulled carriers was introduced after the 1989 Exxon Valdez oil spill, it set off a global ship building frenzy as older vessels had to be scrapped; the resulting overhang is still all too present.
The Baltic Dry index is perhaps the most active and closely watched, a measure of the price of moving major raw materials (not oil) by sea. From coffee to coal, soybeans to steel, the routes criss-cross the globe. The chart shows the tremendous effect the end of the commodities super cycle had on freight rates, which fizzled out quickly when this finally ended in 2011. 'Good times' for ship owners are unlikely to return any time soon and nor will shipbuilders retake their key manufacturing role they had a century ago. Long gone, this is the new reality.
The bulk of dry cargoes are carried by Capesize ships, too big to squeeze through the Suez Canal (which caters up to Suezmax vessels), bigger than Panamax (Panama Canal) ones, over 100,000 dead weight tons. The workhorses of the seas are Handymax and Supramax, accounting for over one third of the world's fleet, coming in at 40000-60000 DWT. Costing about US$20 million to build, profit margins are fine indeed, with or without cheap funding and government subsidies.
