Shipping: Holed beneath the waterline

Put simply, the cost of shipping has dropped through the floor. Sending a tonne of iron ore from Brazil to China in early June would have set you back more than $100 (£62) per tonne, or around $15m per voyage. But freight rates have now dropped to only slightly over $10 per tonne, or just $1.5m for the 70-90 day journey.

As if that wasn't dramatic enough, the drop in daily charter rates is even sharper. At the peak of the market, a 170,000-tonne Capesize bulk carrier was hired out at the eye-watering daily rate of $234,000. At the beginning of this week, it was $5,611 – a fall of nearly 98 per cent.

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Against such a background, more recent concerns over the economic slowdown in both the East and the West have pushed users of commodities to run down their existing stocks, rather than buy in new supplies at what are still relatively inflated prices.

These are all to some extentpredictable economic adjustments, but a more sinister effect has been that de-stocking is masking the shortages caused by the dearth of credit. Mr Kerr-Dineen says there are around three months left before stocks run out.

"If the problem is not resolved, there will be no way in which even the sharply revised economic growth forecasts for 2009 will be met, because withoutnormal trade economies cannotfunction. Ultimately, flour mills will run out of wheat and power stations will run out of coal," he said.

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So far, the most significant problems have been confined to the bulk commodities trade. Manufactured goods have been are less affected because there is less reliance on letters of credit, said a source in a large container shipping company. Large shippers like Walmart or Nike do not need the letters because they are, in effect, sending to themselves. And even where trade is between companies, long-standing commercial relationships leave a lot more to trust than in the more volatile commodities market.

But firms using containers to ship bulk products such as bananas, meat or fish are feeling the pinch. "We are certainly seeing unusual delays in issuance of letters of credit for commodity trades," the source said.

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Jeremy Penn, chief executive of the Baltic Exchange which runs the Baltic Dry Index, said: "Sentiment is also a key driver and has gone completely into reverse. People are also waiting for prices to fall further. There is no incentive to do today what they think will be cheaper tomorrow."

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He added: "Trading has virtually come to a standstill, because there is no cargo for the ships. There has also been no trading of vessels in the last few weeks, so there is no market value out there for companies' capital investment in their ships."