SHIPPING BLUES
Baltic dry might not paint true economic picture
For some of you, the news that the Baltic Dry index has been plumbing 30-year lows might reasonably be met with the kind of mixed feelings you get when your aunt tells you that your second cousin thrice-removed has fallen ill: it’s sad, sure, but — let’s be honest — do you really care?
Some would suggest that yes, in the case of the Baltic Dry, perhaps you should.
For the record, the Baltic Dry has nothing to do with drought in Latvia, Estonia and Lithuania — it takes its name from the London coffeehouse where it was born more than 200 years ago. Today, it tracks cargo rates for moving “dry” commodities like iron, grain and coal in the big ships that ply the oceans blue. Not surprisingly, shipping companies (and their shareholders) follow the index very closely. So do some economic prognosticators and the more wonky sort of investor, because they see it as a very good predictor of global growth.
Shipping prices are highly sensitive to supply and demand. Shippers charge more when their vessels are packed, and they’re inclined to cut prices when ships aren’t full so they don’t lose money on a voyage. A strong Baltic Dry suggests that demand for “stuff ” is on the upswing, since a lot of it is being shipped between countries. A low BDI, of course, suggests the opposite. And because the index is recalculated every day, it’s considered a real-time indicator, unlike others (like corporate profits) that can lag the real economy by weeks or months.
Those who see the Baltic Dry as an indicator have one very strong proof point: it plummeted through the summer of 2008, presaging the global recession that officially kicked in later that year.
Now, if you believe in history repeating itself, then get ready: the Baltic Dry closed at 559 last Friday. That’s down nearly 50% in 12 months and nearly 30% year-to-date, and the lowest level it’s tested in 29 years.
This is, of course, horrible news for shareholders in the handful of ship- ping companies that trade on international exchanges. And the Baltic believers would hold that, even short of another worldwide downturn, the index’s fall at least means demand for iron ore, coal, copper and other commodities is on the decline.
Global shipments of iron and thermal coal to China — the world’s largest importer of pretty much everything — are slowing down right along with China’s economy, while growth in the EU and Japan is sluggish (or maybe non-existent). In short, global trade has no doubt seen better days. And for any investor following commodity prices — or the shares of metal-and-minerals producers — the decline of the Baltic Dry seems to signal even more stormy weather on the horizon.
Well, let’s hang on: the Baltic Dry Index may not be the leading indicator it used to be.
One reason is that it pretty much always drops this time of year. The middle of winter is a long time from harvest season for grains, and demand from China traditionally slows in advance of the Chinese New Year. As well, low oil prices have put downward pressure on bulk cargo rates, since fuel is the major operating expense for the super-large vessels that travel the world’s long-distance sea routes.
But a bigger factor in the Baltic Dry’s decline may be an industrywide overcapacity in shipping. Big cargo ships take years to build, and a lot can happen between the decision to build them and the day they set sail. A number of new ships commissioned during the good years of the mid-2000s came online in 2008, at precisely the wrong time. And the overcapacity only worsened in the years since. Shipping is a capitalintensive business, and low interest rates haven’t exactly deterred the industry from building ships in hopes of a commodities recovery in the long term. Iron ore producer Vale SA, for instance, has built 35 VLOCs (very large ore carriers) to ship to China, and China itself has been on a shipbuilding boom fuelled by easy credit.
The upshot: carrier rates seem likely to remain low for a long time, as industry overcapacity works itself out of the system. And that’s the case even if global (read: Chinese) commodities demand recovers.
So the Baltic Dry this time around might turn out to be one of those indicators that doesn’t tell us very much. With the iron ore benchmark down 46% last year, and copper prices last month reaching their lowest level in more than five years — well, who needs another one of those?
Carrier rates seem likely to remain low for a long time