LONDON - The prices of wheat, soybeans and iron ore have surged in the past two years, but that is nothing next to the surging cost of shipping goods like these.
Since mid-2006, a confluence of powerful forces - from a shortage of ships to the seemingly unquenchable thirst by China for raw materials - has sent the world's benchmark for shipping rates soaring 365 percent.
The meteoric, and at times volatile, course of shipping costs has grabbed the interest of Wall Street and focused attention on the tiny Baltic Exchange in London, where ship brokers set the price for ferrying goods each day. As the exchange's Baltic Dry Index of rates hovers near record highs, investment banks and hedge funds are entering the fast-growing market for financial instruments linked to the index.
The market for ships has heated up, too. For the first time, prices of vessels designed to carry dry goods like iron ore and grain have eclipsed those for some oil tankers. Some owners are converting tankers to dry cargo ships. Others have begun trading slots in shipyards where new vessels are built. And prices of secondhand merchant vessels are leaping.
"It's absolutely out of the ordinary," said Nikos Nomikos, a professor of shipping risk management at Cass Business School in London and a former Baltic Exchange analyst. "Five years ago, nobody would have predicted that the market would go up by that much."
The 264-year-old Baltic Exchange is happy to be back on the map, said Jeremy Penn, the exchange's chief executive. The Baltic started in 1744, as a coffeehouse named the Virginia and Baltic. Shipowners would meet merchants there to haggle over the cost of chartering ships to transport their goods, mainly tobacco from Virginia and furs from the Baltic region. Back then, the 300 or so members of London's shipping community closed deals with a handshake.
Today, the Baltic remains the world's main provider of maritime market information and controls the process of fixing the daily freight rate. Every day before 1 p.m., the exchange polls about 57 ship brokers from 15 countries, including Norway, France, Japan and Australia, on the prices for more than 50 shipping routes and about eight types of ships.
Visitors to the headquarters of the exchange are reminded of its long history. By the entrance is the bell from the ship The Baltic Importer, recalling the heyday of London shipping, during the Edwardian era, when the city's port was one of the largest in the world. Nearby is a water fountain rescued from the rubble of the exchange's former trading hall, a cavernous affair that was destroyed in a bombing by the Irish Republican Army in 1992.
The booming economy of China has transformed the once sleepy exchange. Because most of the dry goods transported by sea are somehow linked to the steel industry, and China is the world's biggest producer of steel, the Baltic index has become a proxy for the state of the Chinese economy.
But China is not the only reason freight rates are soaring. As global demand for raw materials rises, many goods must be shipped farther than in the past, keeping ships at sea longer. Recent strikes at ports and infrastructure problems have delayed loading. The credit squeeze and the reluctance of banks to lend will make it more difficult to raise the $350 billion needed to finance an estimated 10,000 ships on order.
As shipping rates have climbed, the market for freight derivatives, largely dormant since the 1980s, has sprung to life.
"Shipping is naturally a volatile industry," Penn said. "But as demand increases, it happens more often than not that there is a shortage of ships for a particular period, and prices can shoot up just because people need to transport their goods somehow."
The volume of dry freight derivatives, a market estimated at $50 billion in 2006, is growing because those in the shipping industry need to hedge their risks. Investment banks and hedge funds are also looking to profit by speculating on shipping rates the way they do on stocks, bonds or oil. UBS, JPMorgan Chase and Barclays are among banks that announced plans to expand their shipping investment products.
"I've been in shipping for 20 years, and this is the busiest I've seen it by far," said Tor A. Svelland, head of freight derivatives at the Carnegie Group in Oslo. "And there are still many players, like the Middle East, that are not even represented in the market yet."
Shipowners have ordered ships in record numbers. But many shipyards are already working at capacity. Some of the Chinese shipyards that have agreed to build vessels have not even been constructed. Most of the ships on order will not be delivered until 2010. The backlog is raising concern about a possible oversupply of ships in the future.
"There's no doubt that 2010 is a risk point," said John Luke, head of shipping at KPMG in London. "The big question, is will China keep buying bulk?"
For some in the industry, the large order books are bringing back memories of the 1980s, when a recession and an oversupply in vessels kept thousands of ships in port.