February 12, 2015

Dry Straits

The Baltic Dry Index crashed, at the beginning of February, to its lowest level in almost three decades. Is the long touted bellwether of economic activity- bellwether being the sheep that leads the herd with a bell around its neck- trying to tell us something? 

To be sure, the BDI’s importance has declined over the years. One reason is that the BDI measures shipping demand for dry resources such as iron ore, cement, grain, coal and fertiliser, but the overall shipping market, with container and tanker trade thrown in, is today much broader than it used to be. 

The BDI may not be the sole indicator of the future any longer, but a 60% drop in three months is not something that should be ignored; it has spiralled well below 2008 levels, when it crashed 90 percent in a few months to herald the global economic crisis.  

Some say that the oil price crash has much to do with the BDI’s tanking, and that the index is inherently sensitive to oil prices since moving massive amounts of dry cargo is an energy intensive activity.  That may be true but I believe it is also convenient- but it is hardly the full story. What is happening, I think, is also that the BDI’s constituents are being squeezed breathless from both the demand and the supply sides. Somewhat bitingly, one writer has called this the ‘structural convergence of massive mal-investment meeting economic reality’.

Dropping demand from a slowing China is a biggie hitting the BDI, and is reflected in today’s lacklustre commodity prices. That country’s economic expansion will be the lowest in a quarter of a century this year, and it is the biggest buyer of coal and iron ore in the world; unsurprisingly, here is where much of the heat is coming from. And, some of the rest of the world is in even worse shape. The Russian rouble has crumbled. Europe’s growth is forecast slower, according to their central bank. Japan’s recession continues- even deepens. Brazil is in some trouble, and India is still a question mark. No wonder the price of everything from copper to iron ore has collapsed.

For shipping, the supply side is equally fraught. The dry-bulk fleet has exploded 80% since 2008. Shipbroker Poten and Partners say that, at the beginning of this year, a staggering 336 Capesize bulkers were still on order. The waters have been muddied somewhat by some owners rushing to try to convert large bulkers to tankers in an attempt to take advantage of the present demand for tankers- low oil prices leading to increased stockpiling and a relatively benign fleet expansion in that segment. But this is easier said than done. Lack of management experience in tanker operations from big bulker operators and the lack of ship conversion expertise at many yards are major obstacles here, not to speak of the ships that have reached a stage of construction where they are beyond conversion anyway.

No, things are looking terrible for dry bulk shipping right now. The Baltic Dry Index may not be all that much of a forecaster of global economic activity any longer, but its crash is still telling us something. Just four statistics tell the story. It hit 11,753 in May 2008. By December, it had dropped 94%, to 663. At the time of writing this piece, it is at 590, close to its all time low of 554 is July 1986- twenty-eight and a half years ago.

Ignore these numbers at your own risk. 

This piece was published in the Marex Bulletin today. It is a mere coincidence that the BDI crashed yesterday to its all time low- 553 points, one point below the previous record low set in July and August of 1986.



No comments: