parkwood

Chinese Iron Ore Purchases No Longer the Only Driver to the Baltic Dry Index

Your three factors didn't give out enough supports to your article title.

Factor#1 I don't think China is intentionally cutting their domestic iron ore output to use more oversea ones. China has imported so much ore this year, one reason is the price is cheaper than last year, another reason is, not like Japan, the iron ore import system in China is a huge mess, this has given big speculating chances to the traders and has scared their mills now and then, especially so many small mills who were not allowed to get the contract priced ores directly. Acturally CISA hated this over-import very much, not only is this the main reason causing the failure of the contract price talk, but also it gives the miners excuse to rig the spot market and increase the 2010 contract price. (If China managed to import less, they will save big because the iron ore is still worldwidely oversupplied) Next year if the contract price goes up 30-35% like miners saying, China will use more domestic ores for sure, the domestic and import ratio may return to 50% versus 50%. If it is true, this won't be a good news to BDI and Drybulkers

Factor#2 The volume of the seaborne iron ore in Japan, and also adding that of Korea, is less than one sixth of the volume of China. So Japan isn't and won't be the savior of the BDI. And Japan is also less depending on BDI spot market than China.

Factor#3 Because of the seasonal grain shipping etc. the small vessel rate is quite robust now, but you have already given the answer yourself, BDI is dominated by Capesize Index. On Sept. BDI falled to 2200 something, daily Capesize rate has met with the Supramax rate at $20000/day, now BDI is 4500, Capesize daily rate is $80000-$90000/day, the later one is $26000/day. Small vessel can't and will never save the ass of BDI.

The title of the article is also kind of misleading, the volatility of BDI wasn't driven by China import itself, it was driven by the huge speculations surrounding the China ore import and yearly ore contract price talk.

Rally Boosts Shipping Firms

If you want to talk about the shipping fundamentals, you should ignore these current BDI numbers and stock prices, because they are daily noises. Within the time frame of several months to a couple of years, I didn't see any significant change happening to the fundaments, although BDI was easily doubled recently.

Grain and coal deliveries are the short term factors, the most important factor is still the seaborne iron ore trade, China now accounts for 70%, Europe and Japan are just the small roles, and their recovery roads are still very rocky. When you try to understand the current BDI, there may be a couple of small things being easily ignored by most of people.

1) CISA has planned to change the starting date of yearly contract price execution period from April 1st to Jan. 1st. The miners are now asking 30-35% price increase next year, there has huge uncertainty of 2010 price, but it is widely expected to pick up, this has triggerd the mills and traders stockpiling before the year end. Now the daily CAPE rate almost tripled in the past month, the mills are still facing the pressure to cut their output because of weak market. When the high shipping fees are eating their thin profits, I don't think they will accept much higher shiping rate even under current circumstance.

2) Last week the China Customs released the data of Oct. iron ore import, it was 45.47 million tons, 30% drop from the record high Sept. import of 64.55 million tons. Because this clearance result reflects the actual purchase of Sept., obviously the primary reason was the steep drop of china steel market price at that time, this gives you a chance to look at the maybe real demand/supply of BDI without the current bubbles, you see the BDI dipped to close 2000 on Sept., there has clear connection between them. Here the question is, do you believe china ore stockpiling is endless? If they cut their purchase 30% again after that, how much will the BDI be?

BDI and drybulk stocks are red hot these days, if you want to invest on it now according to these current numbers, it may not be a sure bet. My gut feeling is, no matter how crazy it will be, BDI probably will go back to flirt with 2000 no later than the next first quarter.

Four Shippers Emerging from the Mire

Mark, actually I don't understand what you are talking about? Hedge fund? Have you heard of shipping hedge funds and do you know what they have done in last year crazy BDI market? If you haven't, should we let the discussion stop here or go ahead? Even for those owners or brokers, when they ask a much higher rate the next day, you don't think there has any speculation in their mind? This is an index that can be up or down 50%-100% just in a few days, it is a purest index of supply/demand? Nowaday, more and more investment banks participate in shipping business, I don't say they want to manipulate, but is this business as simple and naive as what you have imagined? Enough is enough, your arguments are more like from a kid's wisdom.

About "BDI share", yes, BDI is not the stock, do you think human beings have no way to speculate besides the stock market? The BDI popped suddenly in the past second quarter, it was fueled by iron ore speculation in China, even the smartest analyst couldn't predict this in that economic environment.

Mark Anthony wrote:

You don't know what you are talking about. BDI index is the purest index that is purely driven by supply/demand fundamentals, NOT by speculation. It is impossible for hedge funds to speculate on the dry shipping spot market. The only participants in the dry bulk shipping spot market are mechants who actually have goods to be shipped, and ship owners who actually have ships for lease. You can not buy/sell/trade BDI shares. There is no such thing as BDI shares. BDI is a calculated pure number, based on spot ship hiring rates.

Four Shippers Emerging from the Mire

The rate crisis maybe is on the way, but not imminent. Short term-wise, BDI and the sector are dominated by speculations, that's why you should think about the things more than the shipping fundamentals, if you want to be a good trader. For examples, now the Capesize rate is up a few thousand dollars everyday, do you really believe it is demand driven? Do you know why? Do you know what's the fundamental of this kind of speculation?

The stock prices are being rigged by the market makers, they are able to do it because the market is full of gullible traders and dumb money, these guys only focus on their charts and candle sticks everyday, they care or know little about fundamentals of shipping industry. If you are a smart trader, instead of fighting against the tape, find the bubble and ride it. If you are a long term investor, just forget all of these stocks.

Commodities Breaking Out: Will Baltic Dry Index Follow?

It is interesting to see optimist show up when BDI is picking up, and vice versa. I respect the technical analysis, but don't believe in your graph too much, there has much complicated stories behind it.

Basically I agree with coprophagous, but I think if the author narrowed the commodity variety to iron ore, it will make more sense. It is widely expected next year the contract price will tick up 10-20%, and the miners now are asking 30-35%. This may not be the breaking out as somebody wishes, it will bring some volatility to BDI. Certainly the overcapacity will be a big headache like the tanker owners now are facing.

BDI Signals Slack Demand for Raw Materials

Ecomike, that scenario is unreal. I don't think China is rigging the BDI now, on the contrary BDI is a useful tool for the miners like BHP sometimes, I know they can affect the shipping rate shortly between AUS and China if they place many orders in the spot market in a very short time. China is more often a victim of such volatility, because shipping fee is a serious part of their cost, compare to it, you know they had a strenuous war with miners just for a few dollars ore price difference, let alone last year BDI bull market has brought huge loss to their mills.

BDI Signals Slack Demand for Raw Materials

BDI couldn't be used as a gauge of economic activity? I don't think so. Actually it is a better gauge than SPX 500, although sometimes more bubbly driven by some specific events, but it more reflects china economy and remotely related to the US one. The demand of iron ores from China in the past years has brought the huge capacity of bulkers, if China stopped the purchasing, BDI would crash, plain and simple.

I have given out a lot of negativity when BDI was 4000 plus a few months ago, now it is around 2000, I am more cautious and temporarily have a neutral rating. There are still very bearish signals existing besides the order book numbers. China steel market prices are still sinking, although at a slower pace, the outputs of the mills are still at high level, they are not willing to cut, they are praying there has a better 4th quarter and wish other mill cut first, if they lost their all margins, they will. The ultimate reason of china huge ore import and high production this year is china's stimulus plan, unfortunately many projects will be finished later this year or next year, that means if there has no another stimulus plan, if the world and china economy don't have a strong recovery next year, the china steel market will have a much harder time, this hardship will transfer to bulker market as well.

But fundamentally there still have some favorable factors for BDI. China's domestic ore quality is deteriorating every year, they must import, sometimes even more if the spot market price is cheap, although you don't know when they will begin the restocking. China economy is still in a much better shape than the US one in the near future, and will benefit from US recovery. CISA is vowing to unified the import price next year to eradicate the speculation, I am not optimistic about their efforts, that is a big force in the volatility of BDI.

China will celebrate their sixtieth National Day this week and will have a long holiday week. Maybe you can have some idea of the BDI trend by watching their steel market performance after the long holiday vacation.

Baltic Indices: Recent Declines Aren't Worrisome

The author knows little about BDI, it reflects the major problem in China, not the global trade, global trade haven't picked up yet this year.

In the past two weeks, the steel market in China has experienced more than 20% price drop, as I said here before, the price soar in the past months isn't a demand driven one, couldn't last long. This drop also gradually transports to the iron ore spot market, until today the indian ore price has dropped to $94-95/ton from $109-112/ton two weeks ago. The traders begin to clear their high inventory at lower price, and the mills are very cautious to buy now, they have lessons last year the high price ore inventory has caused them big loss. The bleeding in the steel market seems not be stopped yet. If we think the speculation of ore price going up after contract price talk has driven the BDI to 4000 high a couple of months ago, now the speculation of going down is also hammering the ore and freight rate market, it is also a spiral one, don't know when and where is the bottom now.

Baltic Dry Index: Worst Week Since October 2008

Current BDI is solely related to China, the BCI bubble in the past months was built on the speculation that the ore spot market price in China would go up, this has driven those traders importing huge amount of ores, even caused the port congestion. Now the spot price is more than $100/ton for indian ores in China, and China is investigating these speculations, the gov believe it is the main reason they failed to reach the agreement with the miners in this year contract price talk, these hurt the incentive of the speculators.

Another interesting thing is happening in China steel market now. The steel price has soared several months in a row, is this a very good news for dry bulkers and miners? maybe not. this soar is not because of the stimulus spending or market demand, the mills just lift the price by themselves. Maybe the mills have to do this because of the higher ore price, but how long will such kind of non demanding driven going up last? it is questionable. Although the market shows the sign of bottoming out, it is still a far cry from last year booming. If the market demand doesn't follow or even get hurt, the mills may have to cut their output to maintain their margins.

BDI Speculation: Beware the Unwinding of Inventory Build / Congestion

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.

Beware the Baltic Shipping Index Signals - Part 2

Current BDI especially BCI is absolute a bubble supported by some short term factors, you couldn't see drybulk shipping return to bull market when steel and iron ores are still in bear markets. Some of these factors are the overstocking in China and port congestion. Now the spot price of iron ore in China is close to benchmark price that China refused to accept, and shipping fee is very high, so the overstocking will get eased soon. For port congestion, it will take a couple of weeks, but won't last long. Another important factor I guess is, it is very likely related to the current deadlock between China and Rio-BHP in ore contract price negotiation. China now is trying to flirt with Vale to reach some kind of agreement first, this will give hard time to Rio-BHP if the chinese have some kind of success, but the disadvantage of the Brazilian ores is it's shipping fee, Brazil is much far away from China than Australia, so the shipping fee difference is a favorable weapon to those australians. If we can see any clear result of the negotiation before the dealine of this month, the current turbulence may wane.

Baltic Dry Index Rise Indicates Good Economic Tidings

This rumor isn't true. The negotiation is in deadlock now, probably it will be broken on the deadline of June 30, then the traditional benchmark mechnism will be over. China said they have enough inventory for three months and they are not worrying about buying the ores if they don't import from Rio, Rio is also very tough, said they wouldn't give out a separate "Chinese price". China said they are preparing for a new mechanism. This uncertainty is causing the fluctuation of the freight rate, if everything settles down, it isn't a bullish signal for drybulkers, because neither miners nor mills are willing to see high shipping fee.

BDI Falters; Stocks Vulnerable?

OsideRes, Japan only imports one sixth amount of ores of China, this is the reason why China is very unhappy that they should followed the benchmark price negotiated by Japan and Austrilia. China is the key factor now, not anyone else. The current high rate of Capesize vessels is largely because of the clog in china ports, it needs 7-10 days for the clearance now. I don't think the rate of $70,000 and more is sustainable. China is overstocking ores now, this kind of import couldn't last long.

BDI Falters; Stocks Vulnerable?

Those traders can profit, because their shipping contracts were signed before the surge of BDI, and because of the slow import/export business, some ports now are willing to provide temporary free store, they just want to make money from busy unloading business.

I think Carlos is right. Normally there has some factors that will cause huge BDI changes during the negotiation, but after that, it will return to normality. The biggest factor I think will decide the trend of BDI is the actual demands of those china steelmakers. Last year the market was so hot, the ore and steel price was very high, no one cared too much about the shipping fee, they just wanted to find the vessels and ores for the production asap, this caused the BDI to jump over 11000, even under that circumstance, BDI collapsed quickly. Today the ore price is already 40% off, although China still managed the same production as last year, their steel market price and inventory deteriorated quickly, the profit of their large mills has dropped more than 90%, most of them are now struggling to make the ends meet, where do you think BDI and freight rate will go?

A few private owned mills said last week, they have enough inventory for a couple of months, because of the current high shipping fee, they won't import any ore this month. These small to medium size mills are the ones who have very aggressive import in the past months. They had huge lessons last year, last June the freight rate from Brazil to China has reached the high of more than $110/ton, but on Dec. it has dropped to $6.88.