BDI Speculation: Beware the Unwinding of Inventory Build / Congestion

After a relatively quiet week for dry bulk shipping rates (for things like iron ore, coking & thermal coal, and grains), I thought it was useful to report Mr. Charles de Trenck's recent words on Baltic Dry Index (BDI) speculation. The BDI has held up lately, but has been helped by continuing port congestion and Chinese port inventory build. To me, it seems the BDI above 4000 likely requires these factors to continue and as they are likely unsustainable, as Transport Trackers reiterated, "chasing the BDI above 4000 makes no sense". In the short term, the BDI can go anywhere, but odds are stacked against you in the current environment.

For example, see my recent piece in regards to declining steel and seaborne iron ore trade this year, which is a major headwind the BDI faces in 2H09 especially after the spectacular growth of the bulk shipping fleet in the recent shipping boom.

BDI speculation: We exited the BDI rebound above 4000 in early June, and all we have seen in recent weeks are speculative and volatile commodities’ moves. In other words…froth. And this even though there were too many Capes sucked into China congestion (i.e., the ramp up in China congestion in recent months). We continue to think select cargo cover charters can offer opportunities, while chasing BDI above 4000 makes no sense

Baltic Dry Index:

Comments

[Alan Young:]

Unless someone has marketed an exotic derivative that I haven't heard about, you can't invest in the BDI (or any index). So what's this all about??

Jun 29 09:19 AM

[Vincent Fer...:]

There are, they are called FFA's, you can visit the site for Imarex to see more. Also, a lot of people unfortunately trade shipping stocks based on BDI movements since it will have a huge impact on dry bulk shipping companies' earnings. You can try to justify a certain stock price by assuming certain future rate levels.

Jun 29 11:57 AM

[carlosG1:]

Good article Vincent. Agree with you on the follies of going long on BDI at this point - not much upside from here. However, I would really like to hear your opinion on whether you think there would be major structural changes in iron ore seaborne trade pattern if contract negotiation between the Chinese and the Australian miners finally breaks down, and the Chinese decide to do all their transaction on the spot market from now on. The trend seems to be moving towards that direction, with the CISA starting to make statements about reducing the duration of the contract to less than a year:

steelguru.com/news/ind...

Although fundamental iron ore shipment will probably not change, it should be interesting to see how short-term shipping demand dynamics that we all know and love (or hate, depending on how you made your bets with the BDI in the past) will be affected. How much would you contribute the recent Chinese inventory build up in the recent months to the annual contract negotiation? If we get, say, four contracts negotiation every year, should this result in more BDI volatility? (assume DWT supply remains steady - for the sake of keeping this equation as simple as possible).

Jun 29 08:00 PM

[parkwood:]

Inventory build and port congestion are the two short term factors affecting BDI, China has three month inventory, but they need to import anyway. So what are dominating BDI in a longer run? I think at least two factors, china steel market and contract price negotiation. Recently China steel market is showing some positive signs, many large mills are increasing their prices now, but oversupply is still existing, many guys believe there will have a pull back in the second half year, let's see. For the negotiation, the deadline has been passed but the negotiation isn't dead. Now the spot price is much higher, but the traders are still holding their inventory, they bet the negotiation will fail finally and the spot price will go higher, last year we already saw they were the gamblers that could import at whatever high price, if their bets are proven wrong this time, you know what will happen. I still believe there will have some agreement finally. If the iron ore market totally turns to spot market, it is too risky not only to the users , but also to the miners. Last year when crude oil reached $150, how much profit went to the producers, but this year it revengefully dropped back to $30, the producers are the biggest losers.

Jul 02 12:53 AM