The Baltic Dry Index (BDI) is in recession territory. It has been a good friend to pundits who make economic predictions. Sorry to say, our friend is sick - but there is every reason to believe the illness was caused by forces far beyond a fall in demand.
Global trade contraction is one of the first warning signs of a recession. The BDI tracts the prices paid for spot shipping contracts to move raw materials (commodities) on 20 specific routes. It does not measure shipping prices for movements of finished goods.
In theory, all things being equal, this index is a true indicator of the laws of supply and demand. Less demand, shipping prices fall - more demand, prices rise. I have spent most of my career involved in international transport, and still continue to receive industry reports and attend marine conferences. So I have been entertained by "pundits" who misinterpret what is happening.
The best analysis of what is going on with the BDI was published by Bloomberg this past week:
"The biggest problem is that the fleet is continuing to expand like there's no tomorrow," said Sverre Svenning, director of research at Fearnley Consultants AS, a unit of Oslo- based shipbroker Astrup Fearnley. "We've seen that the imbalance between demand and supply has just kept increasing."
The fleet of dry-bulk commodity carriers will expand 14 percent this year, compared with a 3 percent gain in seaborne volumes of minerals and grains, according to Clarkson. Yards delivered 146 dry-bulk carriers last month, an all-time high, Svenning said. The IMF cut its 2012 forecast for global economic growth on Jan. 24 to 3.3 percent from 4 percent.
……"I can't see much happening until March or April 2013," said Derek Prentis, an 86-year-old shipbroker and consultant who is the Baltic Exchange's longest-serving member.
To add some context to the Bloomberg article, the following table provides some indication of the expansion of ships types used in the BDI:
|in service||in build||expansion|
What this table cannot tell you is when or why the ships are coming on line. In many cases, the new build is not because of higher demand - but higher efficiency (hull and propulsion) to reduce costs. Unfortunately, most of the less efficient ships are not being scrapped but just sold off. This just adds more tonnage to an already oversupplied market place.
So yes, just a small increase in the supply of ships can make a major difference in a very competitive marketplace. It makes the BDI an inoperative economic indicator, and one less tool which can be used as an economic metric.
From a different perspective much of the debt from shipping is held by European banks - and if the recession in shipping rates continues, defaults could add significantly more headwinds than a Greek default.
The Econintersect economic forecast for February 2012 was released this week, and continues to indicate a strengthening of economic fundamentals. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Many of this index's components draw on transport industry movements.
Economic News This Week:
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession was to hit before the end of 1Q2012. At this point, the chance of a recession based solely on the coincident data is becoming unlikely.
Econintersect's February forecast is not recessionary (one month look-ahead). This week ECRI's WLI index value was -5.2 - a negative value but the best index value since September 2011. This is the third week of index value improvement. This index is indicating the economy six months from today will be weaker.
Initial unemployment claims fell 12,000 to 367,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge - the 4 week moving average - fell slightly to 375,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contains economically intuitive components (forward looking) were positive. The jobs report (not economically intuitive) was good on the surface, was controversial - but remains the best January in six years.
Click here - to view the below table with active hyperlinks.
Bankruptcy this Week: Privately-held United Retail Group, Game Trading Technologies, privately-held Jobson Medical Information Holdings
Bank Failures This Week: None
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.