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Of all the things that are bouncing—and the list is growing daily—these two charts are probably the most impressive. Wow. I first highlighted these charts in early February as a sign of an incipient global recovery. Now they are not far from returning to pre-crisis levels.I keep hearing skeptics claim that this is all just China buying, shipping and stockpiling iron ore, and so it is not really reflective of what is going on around the globe. Earlier this year, many said that the rise in shipping costs would soon reverse as a lot of new shipping capacity was scheduled to be launched. I have to believe that the charts are indeed reflective of some genuine growth. The global economy is surely on the mend.
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How much of the Baltic Dry Index reflects the price of oil though? I spoke with someone involved in the shipping business and he contended that shipping costs were largely driven by this factor. Does this make sense?
If the below doesn't sound like China, china, and more China, I am not sure what does...
"China’s iron ore imports ran at a record pace in February, March and April, according to customs data.
The line of capesize vessels at Chinese ports has climbed to 70 from 33 two months ago, according to data from Simpson, Spence & Young Ltd.,
Such is demand that shippers “are almost pleading” to hire vessels, Stuart Rae, co-managing director of M2M Management Ltd., a hedge fund group that trades freight derivatives and operates carriers, said by phone today.
The rally “is being driven by iron ore, by congestion in China, and by a lack” of ships available for hire in the Atlantic."
The Baltic Dry Index only reflects shipping costs for bulk commodities such as iron ore. It doesn't capture shipping rates for oil.
And even if China accounts for all the rise, it's undeniable that China is growing and consuming more and producing more. This is an unambiguous positive for the global economy.
The price of oil is irrelevant to the BDI. The BDI is largely a proxy for the developing world. Right now, the main driver is Chinese iron ore shipments, but gains and other commodities affect it at the margin. A rising BDI is the first sign of a return to health in the global economy. The second thing we need to see is strength in container shipping rates. This is a proxy for finished goods and OECD trade. When this sector of shipping rebounds (it is still hurting badly), we'll know we are really on the path to broad economic health.
I did not mean to suggest that shipping rates for oil drive the BDI. Perhaps the individual I spoke with meant that the price of oil drives shipping costs as these ships are, I imagine, powered by oil in some form. It seems therefore that, all other things remaining equal, increases in the price of oil would cause an increase in the BDI. Am I correct?
No, shipping costs are primarily determined by supply of ships and demand for shipping. The cost of running a ship (e.g. oil) would set a floor on the shipping rate, since operators would not run their ships at a loss, but other than that oil doesn't really play a role here.
Bunker fuel, which ships run on, is a small piece of the cost to operate a ship. Crewing and insurance are more meaningful costs for owners. Even these don't really move the needle. Supply and demand is it. One of the biggest factors driving the BDI is port congestion. There are something like 40 ships lined up to load coal in South Africa right now. Newcastle in Australia has alot of congestion too. More Ships that are waiting around means less ships available to commit to available cargoes.
Thanks for answering my questions on the BDI, fellas. That really cleared it up for me.
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