Despite the drop in fuel prices, the Baltic Dry Index, the global benchmark for ships carrying bulk commodities, has fallen 40 per cent since the start of November and is down 62 per cent this year.

The Baltic Exchange's main sea freight index continued to fall this week as rates for capesize and panamax vessels continued to plunge. The overall index, which includes average daily earnings of capesize, panamax, supramax and handysize bulk transport vessels, fell by 38 per cent in just one month, from 1306 to 814.

At first sight this may seem counterintuitive. Shipping companies, as any other companies that focus on the transportation of goods, stand to receive a benefit from cheaper fuel costs. In fact, for shippers fuel is one of the biggest expenses. And yet, freight rates for capesize ships have sunk nearly 50 per cent in the past three months.

Capesize ships are huge cargo tankers that usually transport iron ore or coal and are too large to pass through the Panama or Suez canals. They therefore must sail around the Cape of Good Hope or Cape Horn, hence the name. Because capesize ships are the largest kind of dry bulk carrier and account for approximately 40 per cent of the tonnage afloat, their activity is followed closely as a barometer of global trade.

Global Dry Bulk Shipping Market More

Current capesize rates average significantly less than $111,000 per day at their peak in 2008. In the supramax market, or vessels of about 57,000 tonnes, daily rates averaged more than $40,000 per day in the peak in 2007 and 2008. Capesize spot freight rates are now quoted at $4,400 per day.

Of course, energy costs are not the full story. Thanks to a glut of iron ore, iron ore prices have fallen nearly 50% this year, and as a result there is no rush to order new shipments. In addition, China's coal imports are down 13% year to date, and restrictions on the quality of imports could also limit coal shipments into China as Beijing looks to help the domestic sector.

As fuel costs come down, tankers are picking up speed and arriving at ports sooner, which, exacerbates the problem of over-capacity. Over the past three years, average speeds for bulk carriers have come down from 8.6 knots to 7.1 knots as bunker fuel prices stayed high.

What's more, in 2015, ships traveling within 200 miles of shore in Northwest Europe or North America will be required by the International Maritime Organization to burn cleaner - but more expensive - gasoil instead of traditional bunker fuel. Bulk carriers servicing North America could see their operating costs go up thanks to these newer emission control standards.

Shifting raw materials around the globe has rarely been cheaper in the 29 years since the Baltic Dry was launched and capesize rates seemingly face a difficult year ahead.

For more information on the Global dry bulk shipping market, see the latest research: Global Dry Bulk Shipping Market

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