When the charter rates were going up dramatically as seen by the BDI Index, companies started locking in futures (FFA's) on the assumption the rates would continue to increase. Much the same as airlines and ocean carriers who bought future bunker (oil) contracts.
Just as the price of bunkers has decreased, so too has the price of charter hire.
An example is Fortescue Metals, who bought contracts for the future. They quoted including the freight (CFR - cost plus freight), and these orders did not materialize, or were cancelled (I guess). They have orders, but only the ones where they quoted just the cost of the product loaded onboard the ship (FOB - freight on board).
From Lloyd's List
This came after it suspended all its long-term CFR contracts due to “unforeseen circumstances” which it did not explain but were related to the dramatic collapse of bulk charter rates. Fortescue Metals contracted its CFR business at much higher rates than current spot prices.
The firm said about 66% of its iron ore sales have been on CFR terms “but this is likely to reduce to around one third of sales”.
Fortescue’s FOB contracts are unaffected.
In general the demand for international shipping has decreased dramatically, and will probably stay close to these levels for the next year (in my humble opinion). Well, not just me. There are some saying we won't see any improvement until 2011.
More on that later.
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