Baltic Dry Index .... again....

[Bigmack]

Here's the latest piece I've seen on the BDI..
- - - - -
Thursday November 20, 2008
Baltic Dry Index falls 93% as shipping rates plunge, signalling global economic collapse


bloomberg.com :

In 2007 Q3, Volvo booked 41,970 European orders for new trucks. In 2008 Q3, Volvo's order book got destroyed to the tune of 99.63%, with customers signing up for just 155 vehicles. After months of money-market madness, slumping stock markets, collapsing currencies and bank bailouts, the headlines from the broader economy are starting to roll in - and the news is all bad and getting worse, fast.

If nobody is buying your trucks, you don't need to rent a vessel to ship them. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, collapsed from 11,793 to 815 - it is now 90% cheaper to ship goods over the oceans. With operating costs of about $6,000 per day, these ships have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July. It isn't just the oceans that are emptying - air freight traffic dropped 7.7% in Sep 2008, according to IATA.

- The history and financial textbooks of the future are likely to include this chart above, or some variant thereof. The Baltic Dry Shipping Index is a composite index of bulk shipping rates for various types of cargo, mostly commodity-type cargo such as iron ore, crude oil and grains. It is considered a reliable leading economic indicator without speculative elements involved, since nobody books space on a large cargo ship if they don't have anything to ship.

Hence, the over 90% drop in this index means that the demand for shipping bulk cargo has fallen off the cliff. And the sudden drop in demand for shipping these raw materials like iron, copper and so on is signalling that the global economy is heading for collapse. It's a horrendous scenario depicted in this chart. You can imagine what the GDP figures for 2009 are going to look like.

http://www.post1.net/lowem/entry/baltic_dry_index_falls_93_as_shipping_rates_plunge_signalling_global_economic_collapse

[Lithos]

1. Graph doesn't follow global trends

The world economy was much better in 2006 than 2007 which in turn was better than 2008. The graph doesn't show this behavior.

L-

[xchrom]

2. i guess if i want to see something from this -- it's increased trade

via shipping or other methods between better trade partners -- i.e. u.s. to europe ot u.s. to mexico, central and south america.

right now it's not showing anything good.

[pa28]

3. Agree. The BDI chart points to a collapse that exists beyond the world of shipping.

The iron ore and iron coke trade which normally accompany economic expansion dropped dead. The capesize ships that normally haul these cargoes were leasing out at 200k per day six months ago, today they are leasing for 1k today in some cases - literally going begging.

It's true that cyclical shortages and surpluses of shipping capacity have quite a bit to do with the BDI (so you can't really use it to accurately measure the blood pressure of the world economy) - it can point to a heart attack in progress though. Few goods are moving and more importantly there are no unusual shortages either. It indicates that people are not consuming and spending as they normally do - backing up what only the Kudlows of the world are denying. This is a deep deep recession and the worst could be coming.

[Citizen Number 9]

4. Wasn't the BDI at a similar level back in the 1980's?

Why wasn't a global collapse signalled then?

[pa28]

6. Thanks for the reply. Here's the difference I see.

During that time many brand new ships were delivered into layup as dry cargo rates were extremely low just like today. However, the difference was it was not preceded by a super-bubble in rates and demand which built up over a period of many years. To me, the whipsaw from an extreme high to an extreme low points to a huge amount of unused production capacity within the economy - which in turn will equate to layoffs and job losses around the world. The hallmarks of a depression are shrinking output and extreme unemployment - So, the BDI is just one indicator but I don't like what I see.

[Citizen Number 9]

7. So..

The situation we have now is led by global economic activity (or the lack of it) as opposed to an oversupply of newly built shipping as occurred back then.

Thanks for the answer in advance. :)

[pa28]

8. There actually is not much newly built capacity right now.

Just excess capacity. That's another difference.

Extreme shortage of capacity six months ago - extreme glut right now with very few new ships actually going into service during that time (though plenty ordered and now being canceled).

That's not what really bothers me though. What bothers me is the apparent slowdown / shutdown of the production capacity that normally consumes dry cargo - most notably steel - from cyclical highs just six months ago.

Check earnings estimates for companies like Acelor and U.S. steel - they are cratering along with their stock prices. Layoffs at those companies have already begun and it's only one step to their customers . . . durable goods manufacturers who are no longer ordering product because they don't need to.

Nice chatting w/ you #9

:hi:

[lurky]

5. The curve matches changes in oil costs.

Fuel is the biggest expense in shipping. I'm sure reduced trade is a factor, but let's not over-simplify.

[T_i_B]

9. One other factor here is overcapacity

Shipping lines built ever bigger ships, and now the credit crunch has hit they don't have the containers to fill those ships, hence the fall in ocean freight. The all planned for continued massive growth of trade and built ships accordingly.

[anigbrowl]

10. I do think we should consider volatility

The BDI (based on the aggregate of contractual decisions) is as capable of over-reaction as any other index. But the underlying point is sound. I'd say a huge crunch in early 2009 (obviously) followed by a realization that the sky is still up where it's supposed to be and that there's now a shortage of capacity.

the volvo #s from the start of the article are fucking scary though.