About a year ago, we looked at the Baltic Dy Index as it hit new highs.
At the time, we noted it reflected "global growth, especially Asia and to a lesser degree, Europe. We also
discussed that growth in the BDI reflects a
shortage of shipping vessels as much as it does demand for shipping.
The Baltic Dry Index recently tumbled 40% — on recession fears? new shipping capacity concerns? — but has since recovered much of that loss.
I view these charts as encouraging, with an asterisk. Why not fully encouraging? Because of the other legitimate ways you can interpret this price action:
– Ongoing lack of capacity — with many more ships coming on line over the next 10 years, the tight supply constraints will not be alleviated until much later this decade;
– High prices of Commodities allows shippers some pricing room;
– Marginal Demand increases from China, India and Brazil;
Bottom line: Watch the recent highs for a confirming breakout — a run through 10,630 or so could lead to a move towards 11,500.
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Here is the latest few charts:
Just from looking at the chart, I’d say there is fairly strong inverse correlation between US fed funds rates and the Baltic Dry Index.
The ROC isn’t encouraging. Seems even with the recent volatility the momo jes cain’t gogo.
A friend of mine that is an executive of a shipping company told me that the Baltic index is highly seasonal and can only be compared on a year over year basis.
The swings are much more exagerated this year and seem to be earlier. My friend said that this was due to conditions in China and some bad weather and felt that as far as future contract bookings, things were close to normal.
LEH CFO today talking about Q1 hedging being “counter productive” so far this quarter.
Translation – we hedged our credit exposure at the top of CDS spike and managed to loose more money on our hedges than we made on the cash market recovery. So we lost money on the selloff and the recovery.
I wonder how many other players capitulated and hedged at the March top, a lot I bet.
Barry,
Wow! You have scared me. Are you turning bullish?
By the way, this is an excellent post (in both content and objectivity).
A good explanation for recent (and possibly future) volatility of shipping rates at FT Alphaville today for anyone interested.
There’s nothing to preclude a continued divergence between demand for commodities (on the one hand) and consumer discretionary spending (on the other hand).
DL and I agree —
But understand — this is not a shift on my part — the global growth, domestic slowdown is the same story I have been yapping about for quite some time.
It seems to be the fate of bulk shipping markets to be constantly misunderstood. In January, a precipitous plunge in rates for the largest dry bulk carriers led to a panic that this was finally the leading indicator of the end of the commodity boom. That was even though those involved in the market insisted the main problem was a short-term drying-up of supply of iron ore and coal and a consequent short-term over-supply of ships. . . .
The truth of the situation is that the market for dry bulk ships – and rates for their sisters, tankers – look set to remain highly volatile for the foreseeable future. There certainly remains strong demand for the products they carry and lack of ships in key areas will sometimes create spikes of the kind currently under way or that just before Christmas in the crude oil tanker market. But shipowners’ fears – that they could find themselves with unemployed ships in brief market lulls – also occasionally send markets plunging. It is precisely the kind of situation of which analysts are paid to make some kind of sense. But, with swings so extreme and the market so prone to short-term over-reaction, it pays to treat most rational explanations with some care.
This rally is similar to the current stock market rally, which is looking for a 2nd half ’08 recovery. I’m in the camp that says that is just a mirage, so would look to sell the Baltic at the 10900 level. Compare the Baltic to FDX and UPS, and there isn’t confirmation.
Perhaps there is a larger than normal flux of stuff being shipped to China in advance of the Olympics? Doesn’t make sense if it is construction related (all the buildings are already complete, aren’t they?), but maybe other supplies like food, bottled water, or fresh air? Better to ship in and overpay on shipping than to appear that the party can’t manage something that big…
Then again, maybe not…
Some spin out there that sub-prime borrowers are to fault as the credit lock-up is reducing availble financing for future vessel capacity – see Bloomberg for more:
http://www.bloomberg.com/apps/news?pid=email_en&refer=&sid=a2DTUvO.7jwQ
Lower than forecast capacity = higher than forecast rates. The whole world is subprime now.
The LA Times had an article today about a shortage of shipping containers available for US exports.
This is the inverse of the problem from recent years where containers were in surplus in the US due to the massive inbound traffic from Asia. Rates for outbound container loads were so low that LA’s biggest export to Asia by volume was scrap paper.
Apparently the export/import disparity is starting to shift, at least by container volume if not value.
US Exporters Face Cargo Container Shortage at Ports
http://www.latimes.com/business/la-fi-containers12-2008may12,0,3407915.story
Reuters must read you — this just crossed the tape:
Sector Snap: Drybulk shippers rise on ’09 optimism
Drybulk shipping stocks mostly rose Monday, as a key shipping index pulled back but several analysts reiterated their views that demand should remain strong through next year.
Dahlman Rose analyst Omar Nokta said activity in the sector slowed slightly Monday after robust traffic last week. He assured, however, that long-term fundamentals remain strong as steel prices remain at record levels and more long-term time charter contracts are signed.
Bear in mind the above does not reflect increases or decreases in containerized shipping, it is an index from 22 drybulk shipping routes. It includes such commodities as iron ore, cement, grain, coal, petcoke, clinker, steels, etc, etc, etc traded over a number of standardized routes with standardized “baltic type” vessels.
It’s largely useless as anything but an indicator of sentiment, though it’s true that the drybulk freight market is going completely bonkers right now.
For instance, the BPI route P1 is a trip from the european continent loading via the us gulf, east or north coast south america, and then discharging in europe again with grains, ores, coal, etc.
Trouble is that since ships cost so much in the north continent and med that charterers are ballasting ships from west coast india via east coast south america for trips to europe.
It’s a fun time to be in the dry bulk business, that’s for sure.
Steve C.-
The difference is the BDI went from 1000 in 02′ to near 11,000 in ’07…
Chart looks like it could produce a triangle of consolidation…and then…either way from there…usually higher…
Please keep in mind the BDI only tells us about spot rates. Which means what a ship goes for today, not in 6 months. And that for dry bulk shipping spot rates can change dramatically in a very short period of time. Thus its very possible to have sky high spot rates now, and then have them massively lower say in 6 months. So the BDI is not much of a forward indicator. If there are 10 loads of must-deliver commodity but only 9 must-utilize ships this month, then the price of shipping will be sky high. But if next month there are 11 must-utilize ships for only the 10 must-deliver loads, then the pricing negotiations will be COMPLETELY DIFFERENT.
If you look at freight forward curves then you will see that while the BDI has risen lately, longer term rates have actually fallen. I wouldn’t read too much into the BDI action. Its a spot rate index for an industry where spot rates can be up or down 80% within a year, so it is almost meaningless as a forward indicator.
All other things being equal, wouldn’t shipping rates move higher in conjunction with higher oil prices?
In other words, should this move back up really surprise us, considering that oil has moved roughly 50% higher over the same period? (since mid-Jan)
Unless I’m missing something…