Baltic Dry Index Retreats: What Are the Drivers?

As the Baltic Dry Index (a global shipping "price" mechanism) scuffles back to early May levels despite a "recovering global economy," one must ask what are the drivers? We were raising the question nearly a month ago [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Prescursor to Slowing Loan Growth?], but as always with the stock market, news does not matter until it matters - hence the cheap headlines of "US markets down on China" are comical, considering the Chinese market has been down many days this month and it did not matter all those days. But suddenly it matters today.

China has simply been the world's driver of all things trade this year - especially of the commodity sort. When the Baltic Dry Index started rallying early this year, we were asking what was the real cause? [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] We opined it was the Alan Greenspan / Ben Bernanke effect on steroids [Feb 16 2009: Is China Pulling an Alan Greenspan?] and in retrospect we appear to have been dead right. When China turned on the spigots, commodities and asset values began to fly higher. The "markets" saw these moves up and attached them to organic recovery signals. Pundits climbed on, and green shoots were shot out from cannons.

If I can be blunt, it really just looks like a major headfake - central banks have been pushing money into the atmosphere and it is going to help out a relatively small band of speculators in most countries [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] - really very little different than when Greenspan flooded the world with US pesos after the Asian currency crisis in 1998 and before Y2K at the turn of the century. We saw how that turned out (NASDAQ 1999-2002) But until the party ends (see real estate America 2004-2007) no one will ask questions.

Since the market works on its own reality, we have rallied constantly on green shoots - and we own a few things (such as a housing stock) not on belief in real recovery, but on the market's belief of perception of a real recovery. Or government's flooding the world with money that artificially create short term recovery. Which goes to the larger point newer investors need to learn - the market is not about reality, it is about the perception of reality... at least in the short to intermediate term.

Does it matter if housing falls into a tailspin (which it will if the $8000 handout to 1st time homebuyers doesnt turn into a $15,000 handout for everyone this winter)? Not in the near term. Does it matter if much of the surge in copper, oil, and other said commodities is nothing more than China stockpiling? Not for those who made money on those rallies. Obviously with central bankers across the world working overtime, the old "signals" we used to use are very difficult to use anymore because basic supply and demand issues of more and more paper currencies chasing fixed supplies of "stuff" has bastardized price mechanisms. What is real, and what is Memorex is very difficult to ascertain.

Which brings us back to the shipping index - all I know at this point is whenever China wants to buy things - prices surge and the Baltic Dry Index goes with it. When they turn off the hose - the BDI goes flaccid. What people are now using as a proxy on global trade really has become China's personal plaything. But that won't be how it is couched in the mainstream.


If you really believe the world economies have turned healthier the past 3 months, you have to look in the mirror and ask why Baltic Dry Index is back down to first half May 2009 levels. Remember almost every country has based their recovery on exporting their way out of this mess (excluding China, which is trying to get its consumers to act like Americans) So how do all the world's major countries export their way to prosperity ... and the BDI act like what we see above?

Will it just be too convenient to only use the Baltic Dry Index as a signal when its going in the "right" direction, and ignore it when it's not supporting your case, dear pundit? Based on "hey China does not matter" talk I am hearing now (laughable), surely the pundits are back to their old ways already. But let's remember the reality the next time the BDI starts to rally, because while infotainment financial TeeVee is brushing the BDI weakness under the rug, let it be known the minute it turns back up it will be headline news. And we'll know that is simply means China has decided to show up again incrementally making purchases in the commodities market.

Aside from China's hand on the spigot the other (longer term) main issue facing shipping rates is potential supply of new ships. It is a complicated issue because older ships to transport coal, iron ore, fertilizer and the like are being retired while new ones are coming to take their place. There seems to be more supply than needed coming online - but then again, with the wonderful recovery we are about to enjoy, in theory we would "need" them. Ahem. Bloomberg has a piece on this subject below that is worth highlighting.

Our only position in this sector is Excel Maritime Carriers (EXM) which we've been patiently sitting with a placeholder position waiting for a gap in the lower $6s to fill. Why have I not been shorting it considering the very obvious gap? Scary sector to short when these stocks can move 10-15% in the drop of a hat. Why do I even bother with a long position in this sector? The same reason I own a housing stock when 18 million homes sit empty in America.... Kool Aid ingestion by stock market investors aka fundamentals mean little when 'perception' is everything.


Via Bloomberg

• Just as global trade starts to recover, the shipping market is crashing for the second time in a year as China reduces raw-material imports and record numbers of new vessels set sail.
• The rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50 percent from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7 percent lower.
• Shipping rates, which already fell 59 percent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 percent drop in world trade for all of 2009.
• A record 146 capesizes will be added this year, equal to 28 percent of the fleet, according to Fearnley Consultants A/S. “The pressure of the new ships will be overwhelming,” said Andreas Vergottis, the Hong Kong-based research director at Tufton Oceanic Ltd., which manages the world’s largest shipping hedge fund, with $1 billion of assets. “It will take a lot of time and a lot of pain before shipping recovers.”
• “We’ve seen several yards that have delivered their first ships, albeit delayed, and we expect them to increase the pace of deliveries in the second half,” said Svenning, who is based in Oslo. “We will see more next year than we see this year.”
• Mitsui O.S.K. Lines Ltd. and Nippon Yusen K.K., both based in Tokyo, and China Cosco Holdings Co. operate the world’s biggest bulk-shipping fleets, Mitsui says. Nippon Yusen forecast its first full-year loss in 23 years last month, citing lower demand for container shipping, and expects capesize rates to average $55,000 in the six months through March 31. Mitsui cut its full-year profit estimate by 25 percent last month. China Cosco said on Aug. 27 its commodity ships lost money in the first half.
• Estimates in the survey ranged from $10,000 to $25,000. Sverre Bjorn Svenning, the analyst at Fearnley Consultants who correctly predicted last year’s collapse in the Baltic Dry Index, which fell 92 percent, was at the lower end.
• The drop in capesizes is consistent with the Baltic Dry Index, a gauge of the cost of carrying dry bulk commodities such as iron ore, coal and grain. The index, which includes four types of vessels including capesizes, more than tripled this year. The index is 44 percent off its high for the year.

Heck, the supply issue is so overwhelming I am not even sure if green shoot Koo Aid can save this sector.Again, China is everything in this market now; Americans need to stop looking inward and using old sign posts or believing. BDI is some global growth signal. It's China's import signal now - they are the world's marginal buyer.

• (Chinese) Imports of refined copper fell 23 percent in July from the previous month. Coal shipments shrank 13 percent, customs data show. Iron-ore purchases will likely average about 16 percent less in the remainder of the year than in the first seven months, according to Will Fray, an analyst at Maritime Strategies International Ltd. in London.[Aug 24, 2009: Bloomberg - Coal Rally Ending as China Shuns Imports, Opens Mines]
• “China could very easily turn the taps off,” Fray said. “Rates will keep sliding.”

[Oct 31, 2008: Credit Tsunami Swamps Trade]

[Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]

Comments

[doubleguns:]

Maybe they could haul green shoots for CNBC. Yea but whos importing green shoots.

Sep 01 08:15 AM

[CautiousInv...:]

Mark, you took down all of the low hanging fruit on the BDI, leaving almost no room to comment.

Another indicator of what is taking place within China is rail traffic, which measures manufactures being moved about for production, sale and export.

Guangshen Railway Freight Traffic was down 23.2% in H12009, which is about in line with the contraction in exports and reinforces the view that one should not expect current BDI trends to be reversed in the short term.

Sep 01 08:47 AM

[one eye:]

The ceo of TBSI believes in a 2nd half recovery in shipping, Insider buying seems to indicate faith as well, but they do the Asian routes so that may have something to do with their optimism.

As always, selectivity will govern the Dry Bulk Trade.

Sep 01 08:49 AM

[John Galt:]

> Since the market works on its own reality, we have rallied constantly on green shoots - and we own a few things (such as a housing stock) not on belief in real recovery, but on the market's belief > of perception of a real recovery.

Not to tell you how to run your money, but isn't that exactly what happened in the market since March 9th?

There is some old story about a Brittish face test as a way to think of the market. If they put pictures of 100 female faces in the newspaper in a beauty contest, you aren't picking YOUR favorite 5 faces, you are picking what you perceive as everybody elses favorite 5 faces. You might think the one that looks like Angelina Jo Lee looks the best while most people pick the one that looks like Heather Locklier. Then again that theory is for traders and goes against the buffet/value philosophy where you use people's dislikes against them.

You can't mention China without mentioning stockpiles, and the perception is that they overstocked now, so that they will understock later ( Bad for the BDI).

In defense of the BDI though, we are in the weaker summer months and I was expecting this decline. Traditionally the BDI picks back up in the fall.

There really are a lot of variables but I do agree the lowering of the BDI doesn't play into the whole "recovery" theme as the BDI is a leading indicator.

Sep 01 08:59 AM

[predictorma...:]

Great article with numerous facts that are ignored by all the financial and mainstream media.

Just like housing 2004-2007 (as mentioned above) all the facts are in clear view if you look.

We are heading lower this month and next.

Sep 01 09:23 AM

[Kaan Berker:]

Interesting... Especially when reading writer's correct comment on "preferential" treatment of BDI data: "when increases (suggests recovery) refer to it", "when decreases ignore it", as some Turk writers do here in Turkey.

So, what will the exact form of recovery be, W, double-W etc.?

Sep 01 02:36 PM

[Mark Anthony:]

Trader Mark:

You get it right it's all about China buying. But what you do not get is why China was buying and why China will continue to buy. Iron ores import in first half of 2009 was 30%+ higher than same time last year. Do China really need that much steel this year? No it's for stockpiling.

China has a big problem with excessive US dollar foreign reserve holdings. Hot money flooding in China only adds to China's money problem. China can not sell it in open market, but can quietly spend it out. China has been on a global shipping spree. Predictably China must continue to buy and it means ships will continue to be in demand. Do not be puzzled by China's temporary slowing down the pace a bit to allow prices to fall back.

If China does not want to be a big bag holder of US dollar it better hurry up. This is the fundamental reason commodities and shipping will continue to be bullish.

Sep 01 04:58 PM

[DavoSing:]

Marc Faber wrote a great book (in 2003 I think) called Tomorrow's Gold. In the introductory chapter he divided the world into four imaginary regions, one of which was called Diligence, that would build enormous reserves of the worlds most traded currency, the "Bananadol". As Diligence rose to global dominance, it had the dilemma of what to do with a mountain of Bananadols before the value of that currency collapsed. The key method was by spending it on building stocks of resources that have intrinsic value. The next part of the puzzle, which relates to the discussion on BDI, is that Diligence would consciously make use of its non-transparent market to distort global prices. The government of Diligence actually found the rest of the world foolish to disclose information on financial reserves. Diligence would pay a high price to build resources, but could also make secret put/call deals on the same commodities to confuse the market. it would over buy, and then halt buying. It would release credit into the domestic market, and then withdraw it. All without the need to explian to the world what is going on. In fact, one of the most important tools of Diligence in the global market was the fact that the outside world could not have accurate knowledge of the inner workings.
I think Mr. Hu from Rio could ponder this fantasy world from his jail cell in China.
I think it is also clear that we can not rely on any previous indicator of global economic activity, BDI included, as it is open to distortions,both accidental and deliberate.


On Sep 01 04:58 PM Mark Anthony wrote:

> Trader Mark:
>
> You get it right it's all about China buying. But what you do not
> get is why China was buying and why China will continue to buy. Iron
> ores import in first half of 2009 was 30%+ higher than same time
> last year. Do China really need that much steel this year? No it's
> for stockpiling.
>
> China has a big problem with excessive US dollar foreign reserve
> holdings. Hot money flooding in China only adds to China's money
> problem. China can not sell it in open market, but can quietly spend
> it out. China has been on a global shipping spree. Predictably China
> must continue to buy and it means ships will continue to be in demand.
> Do not be puzzled by China's temporary slowing down the pace a bit
> to allow prices to fall back.
>
> If China does not want to be a big bag holder of US dollar it better
> hurry up. This is the fundamental reason commodities and shipping
> will continue to be bullish.

Sep 01 09:09 PM

[ramisle:]

Dry Bulk has always been cyclical, for this reason dry bulk shippers have a traditional PE of 6-8. Like many other sectors they are doomed to repeat the boom and bust cycle of shortage of ships and glut of ships. Many people have insisted that the remedy is simple, cancel the Orderbook of ships to be built. It is far from simple. Deposits have been paid, and those have been followed by more money as the ship progresses from keel laying to finish. The easy ones were cancelled, the rest will be delivered, maybe not to the original owner, but to bargain hunters.
And then there are the miners and steel makers who are building a fleet, rather than pay more for shipping ore, then the ore was worth, like in May 2008. Vale and some Chinese companies have been buying up the older Capes, they are NOT being scrapped. And Vale and some of the huge steel makers like POSCO are ordering new VLOC's which hold the equivalent of 2.5 Capes. Soon, Vale will not be hiring independent shippers to haul their ore, they will have a fleet of 35 ships. There will be a glut of ships for years to come, if you think scrapping is the easy answer, then why hasn't EXM scrapped the Lady, a 24 yr. old Handy? Because it still makes more than the $ 3 million it is worth in scrap. And the Breakers make more money scrapping the single hull tankers. The Tankers, Containers and Bulkers all have excess capacity at the same time.
China is still importing record amounts of ore and coal, and producing record amounts of steel, and yet the BDI continues to fall. This is because of the growing fleet, the reduction in the line of ships wasted, by waiting to unload, and the fact that China cannot carry the Dry Bulk sector all by itself.

Sep 01 10:02 PM

[Tedi:]

Apparently, it ain't retreating, it's a regression.

BDI rose in first half mainly because China imported huge amount of commodity like iron ore and coal, 4 trillion yuan stimulus package (38% of the money went to infrastructure) encouraged the record 7.37 trillion yuan bank loan to enter into infrastructure investment, and most of the 'TRADERS' speculated a boom of commodity price later, that's why the port stockpile of iron ore was continuing growing more than 70 million tons.

But does China real need that many iron ore? According to China government, the country will plan to produce 460 million tons of crude steel this year which an approx 736 million tons of iron ore will be needed, let's say 50% of them are imported, that will be 368 million tons, but the actual amount of imported iron ore from Jan to Jul was 355.3 million tons according to China Custom.

It's a cliche though, the real problem of China is oversupply. After such a ballyhoo, the market will return to her fundamental before demand is recovered. For your information, subsequent to July, the new loan of August declined to the nadir this year. If China starts to consume those stockpiles, then that's really bad to BDI, not mention the huge tonnage of bulk carriers will be delivered later 2009 and 2010.

Sep 02 04:10 AM

[Mark Anthony:]

Ramisle:

China has a big problem with their mountain of US dollar assets. Hot money keeps flooding into China using under-ground tunnels in Hong Kong, creating an even bigger headache for the Chinese leader. They want to get rid of the US dollars. They want to do it as quickly as possible and as quietly as possible. They could not sleep at night. That is the reality. And it is not just for China. Japan, Russia and all the big holders of US treasury bonds are facing the same problem.

China MUST spend away the money, and that means theyMUST ship a lot of physical raw materials and goods back home. That's bullish for the shipping sector. We saw it in May-June. China may pause a bit but the pace will pick up again, as the urgency to divest dollar is imminent.

As for the presumed oversupply of new ships, that is a FAIRY TALE. There might be that many new ships on the order books. Those are paper ships. The world does NOT even have that kind of build capacity to deliver that many new ships. There are only three countries making any significant number of ships: Japan, China and Korea. The rest of the world is marginal. There are only a handful big ship builders you can name. Each cape size ship is a gigantic object. You can't build many at the same time as there is not even physical space to accomodate them.

Do the research on actual global ship building capacity. Do not just look at order books.
seekingalpha.com/autho...

Sep 02 11:09 AM

[Mark Anthony:]

To support the argument I just made. Let me quote this data source:

www.mgn.com/news/daily...

"...global shipbuilding capacity was set to eclipse 50 million compensated gross tons next year (2009)"

That's annual 50 million DWT shipping building capacity globally, for ALL KINDS of SHIPS. Let's say dry bulk ships account for 25% of total global ship building. That would be 12.5M DWT dry bulk ships built per year, max, or roughly 80 cape size dry bulk ships even if all ship builders are running at full capacity and every ship is properly funded.

The new ship order number greatly exagerated the actual ship building that is going on.

Sep 02 01:32 PM

[ramisle:]

Mark Anthony, thats pretty pathetic having you tell me to do some research.
First you need to look up compensated gross tons, so you won't confuse it with million deadweight tons.
There were 90M DWT delivered in 2008 and worldwide capacity is supposed to increase to 190M DWT. Much of that increase is thanks to China. You've been trumpeting the growth of China, are you going to turn around and say China can't do it?
"Let's say dry bulk accounts for 25% of global ship building"
No, let's not. Dry Bulk ships account for 64% of the orderbook.
In 2007 165 M DWT were ordered and 64 more in 2008.
You have been provided with quotes and links to confirm the growth of the fleet but you always dismiss them. Drewrys, Fearnleys, Worldyards, BRS, Weberseas, Platou, Compass Maritime. All Shipping Trade publications, whose job is to follow and report the shipping business. These aren't Blogs.
According to you they are all wrong, Liars, one giant conspiracy to hold down rates.

So, if China is drowning in dollars then how will they use it to stockpile ore and steel. Who has the dollars? It's not the steel makers. So are you saying that the Chinese government is buying up all the inventory of steel? If so, prove it. If not then how will a steel mill that lost money for 9 months be able to keep producing, and keep buying ore?

Sep 02 07:14 PM

[ramisle:]

I know Mark Anthony doesn't do research so here it is:
Compensated gross tons = cgt
cgt = A x gt*B

A = represents the influence of ship type
gt = gross tonnage of vessel
B = represents the diminishing influence of ship size on the work required to build a gross ton.
For example: A Crude oil tanker, having a DWT of 157,800, and a gross tonnage of 87,167, would have a cgt coefficient of 0.36 and a cgt of 31,423.
With a worldwide shipbuilding capacity of 50 million cgt, they could build 1600 tankers, each being 157,800M DWT.

Mark, thats 250 million deadweight tons.

But, most of the orderbook is Bulkers, so you work on that one, Bulkers use a cgt coefficient of 0.61, but I'm sure you knew that.

CGT formula courtesy of Dr. Martin Stopford, Maritime Economics.

Sep 03 04:16 PM

[Prohobo:]

What I do find more concerning is that if we extrapolate out oil prices and we recently see the BDI come off.

I see how the BDI increase can certainly track oil as it rallied from 40 to 70, but now oil is at 70 and the BDI is coming off from the 4000 to the 2500 range.

That is even more alarming.

This article was sent to me this morning - it might be worth sharing:
Ghost Ships: www.dailymail.co.uk/ho...

Note: Buffet this morning, when asked by CNBC if you were on a desert island and could only view ONE economic indicator what would it be - his answer: Shipping!

Sep 16 03:41 PM