The Baltic Dry Index And Chinese Import Figures Tell The Story That Most Economists Don’t Want To Hear
If there was a well known and highly referenced index that had fallen by over 60% year on year not only would the investment community be deeply concerned, the mainstream media would be catatonic in it’s reaction. The headlines would reflect an ‘end of days’ scenario. The shriek, that an inevitable cataclysm of events is about to unfold, would be deafening…
No major, popular highly referenced indices have fallen by such amounts year on year In living memory, either in the 2008-2009 crash or the more recent correction in the final quarter of 2011. The closest we’ve experienced during the Eurozone debt crisis was/is the Athens exchange correction, which has collapsed by circa 50% year on year and this despite a circa 30% increase since the recent low of Jan 10th. But the ASE, despite so much focus being aimed towards Athens, can hardly be regarded as a “main index”.
What if a widely recognised barometer of supposed economic health had fallen circa 60% year on year, such as the SPX or the FTSE 100? Moving aside any belief and theory that the main markets are no longer the straightforward economic health indicator they once were, due to zirp policies, bailouts, rescues, tarp and quantitative easing programmes creating a secular false boom that bears no relation to the economic reality, if the main indices did suffer such falls the reaction would be spectacular.
There is one index that many economists, market commentators and market analysts keep a weather eye on and arguably, because the main markets have been so fundamental altered by the pumping of rescue packages, it displays a truer reflection of current global market conditions as it’s based on the pillars of the world wide economy such as supply and demand, import and export, it’s known as the Baltic Dry Index.
It’s timely and appropriate to mention this index given the figures released this morning from China concerning the exports and import figures; China’s trading activity shrank in January compared to the same period a year earlier, raising concern that weak overseas demand is taking a toll on the export-driven economy.
Figures released Friday by the customs agency indicate imports sank 15.3 percent to $122.6 billion, while exports dropped 0.5 percent to $149.9 billion. It is the worst trade data since 2009. China’s politically sensitive trade surplus rose to $27.3 billion for January, the highest figure in six months. Many financial analysts suggest that January’s trading results indicate the world’s second-largest economy is slowing down, due to the persistently high U.S. unemployment rate and the Eurozone debt crisis.
China’s once red-hot economic growth has eased to 8.9 percent growth, the lowest rate in two-and-a-half years. The International Monetary Fund has forecast 8.2 percent growth for China in 2012, but warns the figure could be cut in half if Europe’s fiscal problems worsen.
China’s previously booming economy is arguably a real ‘old world’ economy. It’s based on traditional commerce, the massive domestic growth experienced has created an epic thirst for imports from countries such as Australia. Whilst financial services have boomed, particularly in the former UK colony of Hong Kong, China’s boom has created a spectacular basic real world commerce requiring the massive importation of raw materials. That those imports have fallen by over 15% year on year should be cause for great concern, particularly if China is regarded as a major pivot from which many other economies are balanced and thrive.
However, the trade figures could be regarded as lagging indicators, notwithstanding that viewpoint the Chinese authorities went to great lengths this morning to stress that the holiday period and lunar calendar have severely impacted the figures. The economic, supply/demand import/export loop is fascinating in light of the fact that the IMF and indeed it’s ‘sister’ organisation the World Bank has suggested that growth could be halved, from 8.3%, if the Eurozone crisis continues or escalates. However, the Eurozone issue may be only part of the issue, the dramatic collapse in imports could herald an altogether more worrying phenomena for the domestic Chinese economy, the intense demand for raw materials could be coming to a sudden end and this sudden hitting of the buffers may have been foretold if we care to look into the dark crevices of fundamental economic data where many fear to go..
Baltic Dry Index
The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index tracks worldwide international shipping prices of various dry bulk cargoes.
The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time-charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”
How It Works
Every working day, a panel of international shipbrokers submits their view of current freight cost on various routes to the Baltic Exchange. The routes are meant to be representative, i.e. large enough in volume to matter for the overall market.
These rate assessments are then weighted together to create both the overall BDI and the size-specific Supramax, Panamax, and Capesize indices. The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:
The BDI contains route assessments both on the basis of “USD paid per ton carried” (i.e. before fuel, port and other voyage dependent costs are deducted) and “USD paid per day” (i.e. after voyage dependent costs are deducted, often called “Time charter equivalent earnings”). Fuel (=”Bunkers”) is the largest voyage dependent cost and moves with the crude oil price. In periods where bunker costs fluctuate significantly, there BDI will therefore move more than the shipowners’ realised earnings.
The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from major financial information and news services such as Thomson Reuters and Bloomberg L.P..
Why Economists And Stock Market Investors Read It
Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).
The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in deserts. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. “if you have 100 ships competing for 99 cargoes, rates go down, whereas if you’ve 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates…” The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.
Tale Of The Tape
On May 20, 2008, the index reached its record high level since its introduction in 1985, reaching 11,793 points. Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986; though by 4 February 2009 it had recovered a little lost ground, back to 1,316.These low rates moved dangerously close to the combined operating costs of vessels, fuel, and crews.
Multi Decade New Low Was Reached On Feb 3rd 2012
During 2009, the index recovered as high as 4661, but then bottomed out at 1043 in February, 2011, after continued deliveries of new ships and flooding in Australia. Though rebounding to 2000 on October 7, by February 3, 2012, the index made a new multi-decade low of 647 on a continued glut of container ships and decreases in orders of iron and coal.
The index is currently 60.01% down year on year and 36.36% down in the first six weeks of 2012. The fact that the new multi decade low was reached in early February should be one of the most sobering economic stats revealed this year. However, whilst many commentators in the mainstream media remained fixated on the main market indices this incredibly invaluable tool will remain over looked.