Baltic Dry Index's Fall Misleads Investors

I spent the earlier part of this week with shipping executives at the Digital Ship Singapore 2009. The focus of this conference was on broadband satellite interfaces with the worldwide shipping fleets, but during the many breaks and liquid entertainment segments, there was adequate time to talk shop about maritime market conditions.

The industry believes the bottom is behind, and all were saying conditions were improving in terms of tonnage. However, many discussed big quarterly losses due to overcapacity.

The Baltic Dry Index (BDI) which is a tracking mechanism for shipping prices has been falling for the last several months making many investors worried that there was little evidence the world economic recovery was underway.

The price fall has been caused by a rapidly expanding shipping fleet against relatively stagnant demand. Hat tip to FNArena for the chart.

The have been many pictures circulating around the internet recently showing idled shipping around Singapore - implying that the global trade is dying. Again, shipping is starting to improve – but the amount of new ships is growing at the rate of almost 400 new ships a year. There are over 1000 too many ships for the existing demand.

Most of the ships are being built in Asia. While shipping lines were indeed canceling orders due to the New Normal, the stimulus programs in Asia provided money to complete the builds to maintain employment.

China, particularly, will now use more and more of its own newly built ships and will arrange transportation internally without creating demand in the world market (thus lowering apparent global demand).

As evidence of improving economic conditions, the ports of Los Angeles and Long Beach posted 2009 highs in sea container counts expressed as TEU – a twenty foot equivalent unit. A forty foot sea container is two TEU’s.

Most of the labor and cost intensive industrial goods are shipped in sea containers. A rise in TEU counts have historically tracked an increase goods production – and this data is available a good month before quantitative data.

The majority of USA imports and exports flow through these two ports. Please note the big rise in exports.

Hat tip to Steve at MEMETICS & MARKETING for editing support.

Disclosures: None

Comments

[H. T. Love:]

Steve,

Thanks for the post.

Q: with the MoM rise beginning in July, do you have any feeling if this is the start of a sustained rise in activity? I was sort of expecting an uptick based on the "inventory rebuild" mantra.

It's gotten so hard to place faith in anything these days with all the false data and constant pumping we get from the government and MSM.

Thanks,
HardToLove

Sep 25 08:30 AM

[pied piper:]

Would the stocking of Christmas inventories be a part of this uptick in August? Thus a seasonal factor for the next couple of months.

Your take?

Thanks from hopeless DRYS holder

Sep 25 03:09 PM

[ain't no fo...:]

I too would be interested in whether there is a seasonality factor around the August numbers - Christmas ramp?

It would have been good to have comps to 2008 and 2007 to see what they showed for YoY purposes. I remember from my toy selling days that August/Sept was indeed a big time of year for importing those cheap action figures from China, so that they were on the shelves by Halloween.

But I thought the author was discussing the dry bulk index. While the container traffickers are a big component of one type of international seaborne trade, why are they relevant here for purposes of the computation of the BDI? Isn't the bulk (pun intended) of the BDI traffic made up of the iron ore, steel, scrap metals, fertilizers, coal, and related product that is hauled on capesizes, panas, handi's and supras on 40 routes around the world? Those are, after all, the classes that the individual components of the BDI are based upon on a daily basis, and which together make up the composite known as the BDI.

I believe that both metrics that go into the calculation of BDI are bearish here. I personally doubt that demand for dry bulk product is anywhere near as strong as prior years from various anecdotal evidence one hears when listening carefully to what the commodity producers, shippers, analysts are saying (and lets not forget government reports such as the terrible ones which are coming out of the likes of Japan Q after Q for import/export numbers, albeit for mostly consumer products), and with supply (of ships) staying static, there would naturally even under that scenario be a decrease in BDI. If you drastically lower demand, and dramatically raise ship supply as well, both of which are occurring in my view, then yes, you have a disaster for the BDI.

And what of China? They are the prime influencer of what happens in the dry bulk shipping world, and therefore dry bulk prices, and just how much of their large imports of commodities such as copper and iron ore this year were inventory builds, obtaining "inexpensive" inventory denominated in cheap US dollars, for product that is being stockpiled but which is not currently being economically employed? Pundits would say A LOT.

Pied Piper, I feel your pain, but I have followed the BDI and made some money on the shippers by understanding just what obscene extremes of good and bad times they suffer and celebrate through. Since last Fall, the extremes have been most obscenely BAD. DRYS has many problems, not the least of which is an owner who can be somewhat erratic and self-serving at times, to say the least, and their monstrously huge series of secondaries since last Fall diluted their stock by a factor of 5 to 1, from 40 million shares to 250 million shares. That is NOT a good fundamental for earnings or share price growth. If you read the Yahoo message boards, then I'm sure you read a guy who is an audio lover, who is much maligned and attacked (usually for being absolutely RIGHT), and he has been spot on about the threat of overbuilding in the dry bulk shipping fleets for well over a year now... I am NOT him, by the way, but most of my money in dry bulk over the past 18 months was made from learning a few things from the encyclopedic knowledge he has freely shared about the industry, and for being out when he is out, and in when he is in. The guy knows more about dry bulk in his little finger than I could ever hope to learn in 10 years.

Sep 26 10:12 AM

[John Lounsbury:]

Steve - - -

Thanks for a timely report. A thought occurred to me while reading this: Is there a correlation between BDI and container counts? Does BDI constitute a leading indicator for container counts? Or is the relationship much more complicated than I am trying to imagine it?

Good article. I am always happy to hear your observations from corners of the world not often reported on here.

Sep 26 12:15 PM

[Michael Clark:]

Is BDI tracking only prices paid -- shipping prices -- and, if so, is this not an accurate indicator of deflationary pressures, even if not one of overall activity?

We may have more ships moving, but if shipping prices continue to decline, is it really a sign of economic recovery or just economic activity?

Sep 26 12:23 PM

[Jake Towne:]

Steven - Interesting piece, especially the container counts. I was wondering if there is a way to assess retail values with the TEUs??

For instance, in bottled water will be a lot of TEUs but nowhere near the same value as TVs of sofas. Any slack in high value shipping demand I would expect to be taken up with lower value goods for awhile.

Sep 26 01:43 PM

[Steven Hansen:]

Hardtolove....
I probably should have included the rail car counts in this article but it just did not seem to fit. we are seeing a more obvious lift in these counts showing they are well above the counts of the recession periods.

PiedPiper and ain'tno....
Glad you asked about Christmas, going back historically August is a low month for containers (months on both sides higher). It is a little early for the holiday period as containers only take two weeks or less from Asia to the USA. Total transit time Asian factory to retail store is approximately one month.

ain'tno.....
you are correct that the headline starts with the BDI and rolls into containers - and there is a big difference between the two from a shipping standpoint. Bulks are full charters and move only when there is cargo - container ships move regardless of load (half empty, quarter empty, etc). The reason investors follow the BDI is that there is no other way to get a sense of tonnage - and this article is telling you that if you are doing that you are getting the wrong answer. I wish there was a way to get accurate and timely information on tonnage on bulk carriers - there is not. But the shipping managers of NOS Shipmanagment; Thome Ship Management; Wallenius, Wallem, OSM, Anglo-Eastern, and Epic who manage the bulk of bulk ships all said the tonnage was up from the recession lows. But overall, everything is down over 20% from the pre-recession peaks.

John.....
there is a correlation between all shipping counts - as the materials to produce the products we consume and covet are shipped many times until they reach your favorite retail store. Normally the bulk tonnage counts lead. And in the USA most of this tonnage rides the rails - and as i said earlier in this comment stream rail counts are up. it really looks to me that the bottom is in, but we need to wait a month or two to know positively.

Michael.....
I never considered that this was deflationary, but it sure as hell is. overcapacity and its side effect very competitive pricing is deflationary. As most of the increase in bulks is used in manufacturing (assuming that food shipped in bulks would not have been effected by the recession), this is a sign to me that a bottom is in place. However, we are well off of the peaks - and is not a sign that a rip-roaring recovery is building.

Jake....
Good question on values being shipped. The ports authorities do not publish this info, and it is part of the export (or import) declarations given to US Customs. This info is released through the BEA but unfortunately they do not differentiate between methods of transport, and the last release was for July 2009. The july report for the first time showed an increase in the three month moving average off of the recession lows. based on what i am seeing in the container counts and talking to the industry, i suspect we will see and obvious upward spike in August. but as i have pointed out earlier, no way am i claiming good times are coming. i am only able to say that we have bottomed, and that there are indications that trade is growing.

to all.....
no one in the shipping industry believes that good times are around the corner. they think it will be many years until we re-establish past shipping volumes.

Sep 26 07:46 PM

[Wildebeest:]

On Sep 26 10:12 AM ain't no fortunate son wrote:
...
> And what of China? They are the prime influencer of what happens
> in the dry bulk shipping world, and therefore dry bulk prices, and
> just how much of their large imports of commodities such as copper
> and iron ore this year were inventory builds, obtaining "inexpensive"
> inventory denominated in cheap US dollars, for product that is being
> stockpiled but which is not currently being economically employed?
> Pundits would say A LOT.

And the numbers would confirm that. Iron ore imports by China are rocketing. And why not, they got a big price reduction for the current contract year, make hay...

While steel production has picked up from the lows earlier this year, it is clear from the data that these record iron imports are not currently all due to demand from steel producers.

seekingalpha.com/insta...

Oct 14 06:51 PM

[Wildebeest:]

I've assembled some some historical import/export and container movement data:

seekingalpha.com/insta...

Oct 15 09:46 AM