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I want to thank a reader for sending me a link to a Marketwatch.com article today regarding an explanation as to why the Baltic Dry
Index may be falling hard. The article provides the following highlights that
I suggest you read before I get into my own commentary.
The warning signs being flashed by the collapsing
Baltic Dry Index (BDI), a leading global economic indicator, may reflect the
folly of misguided expectations during the prior global economic boom,
according to Hong Kong-based shipping analysts.
New super-sized ships ordered up during the era of
cheap credit and surging global trade could
explain the index’s 57% plunge in the last three weeks,
according to Macquarie Research, which described this month’s BDI drop
as “relentless” and “extreme.”
The BDI, which tracks worldwide shipping rates for
dry-bulk cargoes in four vessel classes, is now touching lows last seen in
early 2009, when global trade was just recovering from the financial shock
waves of the Lehman Bros. collapse.
Shipping rates for Capesize
vessels, a class that includes some of the world’s biggest ships, are
down 76% this so far this year.
Macquarie analysts said Thursday the slump in the
broader dry-bulk index represents “too much capacity in the face of
more modest growth of trade volumes.”
Shipping companies appear to have jinxed their own
industry by ordering up too many grand ships when conditions looked very
favorable before 2008.
Meanwhile, further new capacity, equivalent to 22.7%
of the existing fleet, is due to be delivered this year, according to
Macquarie calculations.
“It’s hard to see much relief, even
assuming slippage in the order book [deliveries],” said Macquarie
analysts.
In a recent outlook report, Credit Suisse said the
sector fundamentals may come into better balance in 2013, when new capacity
is due to decline to 8.6% of existing fleet size. The turnaround would depend
upon “significantly stronger” demand, the analysts said, even as
they cautioned against expectations of a recovery along lines similar to
2009, when global fiscal-stimulus efforts were in full swing.
“With the global economy and China slowing
down, we do not expect a repeat of 2009 to 2010,” the analysts said.
The Globe and Mail newspaper cited Export
Development Canada’s chief economist Peter Hall as saying earlier this
week commodity shipments were likely weaker in the second half of 2011 owing
to factors that include the Japanese earthquake and tsunami, social unrest in the Arab world and slower
economic growth in China.
The article on the one hand confirms that shipping
was down because of a slowdown in China. We are now getting indications of
global slowdown and as we saw today in the GDP report, we have a slowdown in
North America. The IMF and World Banks have both warned about slowing growth
and the possibility of global recession and the Fed’s moves confirm
that they too feel that slowdown is here given their target rate held through
2014.
The argument that these ships were ordered during
the boom times, doesn’t wash with me. The glut just didn’t appear
the last month. These ships have been available to haul cargo now for the
better part of 3 years. Why now are we seeing a massive decline in the index?
We saw the same decline in early 2009 and shortly thereafter we saw the great
collapse of share prices in March of 2009.
As one reader commented on the article, “NICE TRY....BUT Those ships are build on a expected
growth...DIDN'T happened [sp] ,TRADE
CRASHED....The BDI is telling the real HORROR story..DEPRESSION
world wide...”
In a nutshell, good are not being moved. There is
less demand because the world is entering a period of slowdown. The charts I
have posted have not let me down. As a reminder, here’s the 3 year
chart I posted the other day:
 
While I might agree that the index looks extremely
oversold, I really doubt that it has anything to do with the glut of ships
but rather is foretelling a slowdown in shipping in general. The fewer good
being moved, the slower the economy is getting.
Another analyst Nick Bullman,
managing partner at risk consultant Check Risks says:
“What this is signalling
is that the world economy is slowing down much more quickly than people have
been thinking.”
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