Transportation

Worldwide Shipping is Stalling

As an indicator of global economic activity, the Baltic Dry Index, which tracks global shipping rates, has been quite reliable at pointing out at least directional trends both in shipping activity and global economy. The higher the BDI, the more goods are being sailed, and traded, around the world.

The performance of ocean-going shippers like Frontline Ltd. (NYSE: FRO), TeeKay Corp. (NYSE: TK), and DryShips, Inc. (NASDAQ: DRYS) can often be forecast by the BDI. The following chart shows the composite BDI as of yesterday:

The index hit a peak of 4,187 on May 25th and has slid ever since. A sub-index measuring the demand for the largest ships, called Capesize or Capemax, climbed to a peak of more than $59,000/day earlier this week. The Capesize ships are commonly used to ship metal ores, and the category also includes the VLCCs that transport oil.

A BDI of around 4,200 is not exceptionally high. In May 2008, the BDI topped 11,000, an all-time high in the heady days before the global economy crumpled. In December 2008, the BDI hit a low of 660 as credit dried up.

It’s difficult to say for sure where the Capesize ships either pick up or deliver their cargoes. But it is clear that the monster ships have been in far greater demand than their smaller cousins. Rates for the Panamax class of ships are around $31,000, and for the Supramax class rates are below $29,000, down from highs less than a month ago of about $37,000 for the Panamax and $33,000 for the Supramax, respectively.

Nowadays it’s common to look at China first when some demand shift occurs. And there’s a strong possibility that Chinese exports are affecting the BDI. For example, Chinese stocks of aluminum have been very high for a long time now, and there is some speculation that the demand for Capesize ships to haul the stuff away is responsible for the rising BDI.

If aluminum from China is the driver, that may end soon as the US Department of Commerce initiates an investigation into dumping aluminum, steel, and paper at below-market rates in the US. The claim from US manufacturers is that the China’s currency peg to the US dollar amounts to a subsidy for Chinese goods and a tariff should be charged to make up for that advantage.

Steel shipments have risen as prices have fallen for finished steel. But the steel makers face an overproduction situation and it’s not yet clear if there will be buyers for all the available steel, even at lower prices.

If ore and metals shipments erode, the BDI will continue its recent slide. Crude oil working through floating storage on about 25 VLCCs, so that could also weigh on the BDI as those cargoes are unloaded and not replaced.

Paul Ausick

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