Wednesday, February 4, 2009

Early sign of global recovery (2)


The Baltic shipping indices are really showing signs of life. After today's increase, the Dry index has just about doubled from its early December low, and the Capesize index is up 187% over the same period. This is not a random wiggle, this looks like the beginning of a serious recovery. Shipping activity is coming back to life. Banks must be issuing letters of credit, and someone out there (with China figuring prominently in the list, no doubt) is stepping up their purchases of raw materials.

UPDATE: As of Feb. 5th, the Baltic Dry is up 125% from its lows, while the Capesize is up 229%. Things are heating up out there!

10 comments:

Michael said...

Scott, this is an interesting comment. As a lay-person, however, I have never studied this index. Do you have any charts that overlay on the economy? How much correlation is there between this index and the US economy? How much of a lead does it have on other indices?

Scott Grannis said...

I've always thought the Baltic index was just a good way to see the trends and strength in global trade, with an emphasis on bulk commodities. But your comment led me to search a bit, and I ran across this site, which shows how the Baltic index correlates to a whole range of other things. Quite a few look promising, suggesting that the Baltic is indeed something to keep an eye on.

http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

I'm going to follow this lead and see where it takes me.

Eldon Mast said...

Scott,

I've noticed that you have the ability to link to my articles where I am referencing your blog...
Is that somehow an automatic feature? Or something that you do manually?

Can you send me a note at
good.news.econ@gmail.com

I have yet to figure out how to do that on my site. I am using blogger and seem to have the links icon exposed, but for some reason it's not clear to me out that link mechanism works...

Thanks for any help.

Eldon

Mark A. Sadowski said...

The uptick in the Baltic Dry Index needs to be interpreted with caution. First, conceivably there is a lower bound below which shippers will not transport cargo. Second, winter reduces the supply of shipping due to ice bound ports and a drop in the water level of rivers, while at the same time boosting the demand for coal and other fuels for the heating season. As a result I don't think this is particularily meaningful.

Chad said...

Mr. Sadowski,

You make a good point. However, when the Dry and Capesize charts are incorporated with the other data in Scott's "More Signs of Life" piece, I think he makes a very compelling argument that the foundation for an upturn in the global economy is currently being laid.

Of course, only time will tell!

Scott Grannis said...

Mark: I agree there is probably a lower bound for shipping rates. Assume if you will that we hit that lower bound in early December. Does the significant rise in rates since then not demonstrate a meaningful increase in the demand for shipping relative to the supply of ships?

Further, I don't see any obvious seasonal patterns in these indices. Perhaps they are seasonally adjusted, but I don't know. Whatever the case, I still fail to see why this latest upturn is not significant.

Mark A. Sadowski said...

Actually these indices are not seasonally adjusted. The reason why you haven't seen any previous seasonal patterns in these indices is that we have never been so constrained by the lower bound. This is a highly unusual situation.

Donny Baseball said...

The BDI is a very good leading indicator of economic activity, it is devoid of speculative content. And Mark's points are valid but mostly meaningless. The bulk of the dry bulk trade is strictly related to Chinese steel production and less so other Asian steel production. The recent rise is almost solely attributable to an uptick in Chinese steel production, which in turn is attributable to stimulus plans getting going and the fall in iron ore prices making smaller mills profitable again. Capesizes are huge and don't go up rivers and they mostly ply Brazil-China, Australia-China routes - no ice there. If there were to be a grain of salt to be taken it would be that this rise is only temporary due to a large number of new vessels scheduled to come out of yards this year. But futures contracts are currently forecasting even higher rates so the market seems to really believe the bullish cargo story.

Scott Grannis said...

Thanks for the excellent contribution Donny.

Mark A. Sadowski said...

Donny,
It's true that a majority of dry bulk cargo is transported by Capesize ships but I think it's a stretch to say that the "bulk of dry bulk trade is related to Chinese steel production and less so to other Asian steel production." You will have noticed that the other two components of the Baltic Dry Index, the Panamax and the Supramax, have also gone up since December, and this is, as i said previously, primarily related to the winter weather in the Northern Hemisphere. (By the way, while we're on the subject of China, coal is the predominant source of residential and commercial heat there and elsewhere in developing Asia.) The Capesize uptick is only so large because it fell so far. The average daily rate for a Capesize vessel peaked at about $234,000. At its low it reached about $2800, or a drop of about 98.8%. Why did it fall so far? Because China was in contract disputes with its major suppliers of iron ore including Brazil following the collapse in commodity prices. Now China has resumed iron ore orders so essentially the Capesize index has gone from almost nothing and is now rising to reflect operating costs involved with the resumption of Capesize shipments for current Chinese production and restocking. There is also indications that some suppliers of iron ore are overstocked and are moving it to other storage facilities. I don't interpret these as bullish signs (as you said, the BDI is not speculative), merely the resumption of shipments after a temporary cessation.