Friday, April 10, 2009

Baltic Dry Index

Following yet another hijacking of a ship by Somali pirates I began to think whether just maybe ship owners, while distraught over danger to crew, might not be thinking the event to be a minor economic positive. Years ago when I would groan that I had a shipload of cargo heading to the United States as the market fell, more than once I muttered, "if it sinks, it's sold." Having insured the cargo there were times in difficult market conditions when total loss would have been the best outcome. It never happened by the way.

One of the most revealing indicators of global economic health is the Baltic Dry Index which tracks shipping rates. When global commerce is vibrant, rates rise as shippers clamor for quick transport in a buoyant market for commodities. At the moment, ship owners are struggling mightily.

Global shipping rates are set to collapse by 74 per cent this year as commodity demand continues to fall in Asia and the massive glut of vessels ordered during the boom years finally takes to the seas. The seeds of despair are always sown in the best of times and vice versa.

The expected collapse in rates, which could push dozens of shipowners close to bankruptcy, comes after a 92 per cent decline in the Baltic Dry Index (BDI) of shipping rates over the course of last year. Any rebound in the index looks to be a year or more away.

At the beginning of the current global downturn the world's nations pledged to remain solidly behind free trade as they recalled the devastating results of protectionism during the 1930's. All those promises has been torn up and binned as countries around the world struggle to satisfy domestic needs in any way they can, even with a policy of beggar thy neighbor.

The closely watched gauge of world trade in iron ore, coal and other bulk cargoes has fallen for 19 consecutive days, the same rate of decline that occurred after the collapse of Lehman Brothers, the investment bank, and the catastrophic freezing of trade finance.

Fleet owners are canceling orders for new ships and a record number of vessels are being put into storage. A ship out of service AND collecting insurance may be the best deal out there, though admittedly a terribly cynical view when it comes to the Somali situation.

Yet these measures, however drastic, may not be enough to fight further alarming declines in freight rates. Even if 40 per cent of worldwide order books were canceled this year, analysts say, the slump in global demand and the sharp rise in Chinese inventories of iron ore and coal suggest that the worst is yet to come.

Chinese imports of iron ore are falling because, despite Beijing's promise of massive infrastructure spending as part of the country's vast $586 billion stimulus package, the pace of construction has slowed dramatically. Iron ore inventories at dockside at Chinese ports are thought to have swollen by about eight million tonnes during February, while the country's exports of finished goods — the sort that used to fill container ships bound for the United States and Europe — continue to fall.

About 10 per cent of the world's 10,650 in-service container ships and bulk carriers are sitting empty and at anchor waiting for cargoes that will not appear until the recession creaks to an end.

John Barnyak