FFA sell-off blamed for tumbling dry bulk indices

By Michelle Wiese Bockmann - Thursday 25 September 2008

The Baltic Dry Index fell 6.1% to its lowest level in 19 months today. The Baltic Dry Index fell 6.1% to its lowest level in 19 months today.
FORWARD freight agreement traders have again shouldered some of the blame for tumbling dry bulk indices, as investment banks and hedge funds sell off derivatives contracts during the crisis gripping the global financial sector. 

The move has added further pressure to the Baltic Dry Index, which fell 6.1% to its lowest level in 19 months today. 

Spot rates for bulk carriers have plummeted over the last month amid widespread concerns that falling steel prices and China’s waning demand for dry bulk mainstays such as coal and iron ore would see shipping demand fall for the rest of the year. 

But this week plunging paper rates have added to growing negative sentiment. 

Capesize contracts for the fourth quarter of 2008 have “fallen off a cliff” according to one derivatives broker, losing more than 40% of their value in the last four days. They were trading at $49,500 per day according to derivatives broker FIS, after beginning the week tat $90,000. 

Fourth quarter panamax paper has also fallen by 30%. 

But like the January market collapse, FFA traders have been accused of dragging down indices, with a major sell-off, or unwinding of paper positions, exacerbating falls in the physical market. 

Investment banks Goldman Sachs and Morgan Stanley have been singled out, along with major commodities and mining giants, which charter thousands of ships annually. 

The investment banks revealed this week they would become holding banks, giving up their independent status in return for central bank protection. 

“We think there has been some unwinding of positions, perhaps by some of these financial houses that have become holding banks,” Cantor Fitzgerald managing director of equity research, Natasha Boyden told Lloyd’s List. 

“We think that’s been putting undue pressure on the FFA market and pushing it down... so there has been downward pressure by some of these financial institutions... and they are pushing it down unfairly.” 

Some of the world’s largest listed shipping companies, whose fortunes are closely linked to the BDI, have also seen their stock come under pressure. 

Hundreds of millions of dollars have been wiped off their market capitalisation in the past four weeks, with average falls of 30% for high-profile stocks such as Diana Shipping and Genco Shipping & Trading.
Most have seen gains of the past 10 months vanish with stock prices crashing to hover at levels seen during the January collapse, amid pressure from short-sellers. 

Shipping is not included in recent bans imposed by the US and UK on short selling, which is when investors borrow shares and sell them in hopes they will fall, to buy them back later at a lower price.
Major listed companies contacted yesterday declined to comment. 

Excel Maritime Carriers shares were quoted yesterday at $18.8, compared with a 12-month high of $82 last October when the BDI was gathering strength. 

The BDI has now lost more than 65% in four months, falling to 4,163 points. The index hit a high of 11,973 points on May 20.
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