Uncertainty of Baltic Dry Index Prompts Long Term Shipping Contracts

Five years ago this week, the Baltic Dry Index (BDI) started its rapid ascent from 7000+ (heady beyond belief by today’s standards), to brush the 12,000 market just three months later. Few would have believed at that time that an index level of 700+ would ever appear acceptable but as the Index hovers around this point trade continues despite the prolonged slump. With some industry experts predicting another dismal year for bulk cargo carriers, there comes a sign that some of the commodity groups themselves may hold a very different view. MOL Cape (Singapore), a subsidiary of shipping giant Mitsui O.S.K. Lines (MOL), has concluded 20-year Freight Service Agreement for 200,000-tonnes-plus class iron ore carriers with international mining group Rio Tinto.
Based on the contract, MOL Cape will place several large-scale carriers to transport iron ore mainly from Australia to China whilst the company has independently developed business in Singapore. Conclusion of the long-term contract with Rio Tinto will contribute to MOL’s earnings stability, and further consolidate MOL’s national business expansion, whilst for Rio Tinto the deal means continuity in the long term regardless of vagaries in the market.
Indices such as the BDI and the trades that drive them tend to be cyclical, the trick being the ability to prejudge the timing of the cycle and overcapacity rarely lasts for ever and doubtless with this in mind Tim Huxley, CEO of Hong Kong-based Wah Kwong Shipping Holdings, speaking to Reuters recently commented:
"We are seeing a lot of the big commodity producers and charterers showing a lot more interest in taking a long-term cover. That would suggest that they think that freight rates are going to rise in the medium to longer-term. 20-year deals are rare, as not many shippers have the capability to strike such long-term contracts. This year is looking pretty grim. For most bulk carrier owners, this is a year of survival."
Source: Handy Shipping Guide