Letters of credit must ‘return’ if shipping rates are to improve, claims Varun boss

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Shipping freight rates can return to normal, not ‘super-normal’ levels, if the bottlenecking of world trade caused by the lack of letters of credit is resolved and the flow of construction material returns, claimed Yudhishthir Khatau, Managing Director of Varun Shipping.

Interviewed at the 3rd International Ship Management Summit, organised by Ship Management International in Singapore, the past-President of the Indian National Shipowners Association, said the banking system had to rectify itself because the market cannot have a double tariff for money – LIBOR and non-LIBOR.

He said: “The most important issue is to regain financial confidence because the situation has been exaggerated because there is an artificial blockage of trade. The reason it is artificial is because letters of credit have stopped. The fundamental tool to shipping commerce is the letter of credit and if ultimately a buyer of a cargo cannot issue a letter of credit and the seller of the cargo cannot discount the letter of credit then you can’t trade and that lack of trade is bottlenecking shipping flows as we see today. If banking confidence is restored then current account trade can continue.

“The second issue is the supply of construction material which requires infrastructure financing. If the bottlenecking of trade sorts itself out and the banking confidence returns then you will see rates going back up to normal levels, not super normal levels, The bank situation has to rectify itself because you cannot have a double tariff for money because today you have LIBOR and then you have a black market for money – the non-LIBOR rate,” he added.

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