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Jan 14, 2008

Shipping index predicts decline in global trade

The Baltic Dry Index, a measure of shipping costs for commodities, experienced its its biggest fall since 1989 last Friday, as the market anticipated lower demand for shipping this year, writes Glenn Dyer.

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The Baltic Dry Index is a measure of shipping costs for commodities and is widely followed by many outside the maritime world as a sort of forward indicator of activity in these globalised trading times.

With resources pouring out of Australia, Africa, Canada and Brazil for China, India and other rapidly growing economies, plus the boom in global non-commodity trades in the past five years, the Index more than doubled in 2007.

But like major stockmarkets, which peaked around October-November of last year, the Index has dropped sharply since peaking around the same time. It has in fact has shed 28% in value, including a 4.6% fall last Friday alone, its biggest fall since 1989.

That’s more than the major stock exchanges, although the London Exchange entered rare territory last Friday when its main index, the FTSE, fell more than 20% from its peak, though it later recovered to close above that level. A correction is a 10% fall from the peak; a bear market is a 20% fall from the peak.

The Baltic Dry Index is more of a forward indicator, like bonds. It tracks transport costs on international trade routes and on Friday dropped 384 points to 7,949 points, according to the London-based Baltic Exchange (it peaked at 11,039 points on November 13).

Traders in London quoted by Bloomberg and other news services said that hire rates for every class of ship dropped on Friday as the market took the view that the coming recession in the US, the slowdown in Europe and China’s slowing economy (especially its easing export volumes) will mean less demand for shipping this year.

Figures out late last week showed that China’s trade surplus narrowed in December, a sign the country’s economic expansion may be slowing.

China’s strong demand for iron ore, used to make steel, helped pushed shipping rates to a record last year, while its demand for oil and gas grains and other commodities also contributed.

But according to the Index, there is a long way to go before the shipping industry encounters losses. Because ship chartering costs are based on the index, there’s an awful lot of profit left even after the 28% fall from the peak.

Rates at the moment are up to four times the break even level for shipowners.

There has also been a sharp fall in the cost of Forward Freight Agreements, which are used by traders to buy and sell to bet on, or hedge, the future cost of transporting raw materials.

The falls on various sizes of ships have been short and sharp, around 20% for the most popular size of ships, the so-called capesize (which they can sail around the Cape of Good Hope) and panamax (because they can transit the Panama canal).

These falls have happened in the past week as traders came to a view that the pace of growth in global trade (and there for the global economy) would fall this year.

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