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Tuesday, 12 January 2016 11:37

Shipping Activity, Leading Economic Indicator, Heading Towards ZERO! Featured

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[Adpated from Wikipedia] The BDI (Baltic Dry 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 the cost of laying up a ship is too high to take out of trade for short intervals,[7] the way you might park a car safely over the winter. 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..."[8] The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such asbuilding materialscoalmetallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concreteelectricitysteel, and food; the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.[9]

Other leading economic indicators—which serve as the foundation of important political and economic decisions—are often measured to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at "People don't book freighters unless they have cargo to move."[12]

Significant levels

On 20 May 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;[13] though by 4 February 2009 it had recovered a little lost ground, back to 1,316.[14] These low rates moved dangerously close to the combined operating costs of vessels, fuel, and crews.[15][16]

By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the reduction of letters of credit, historically required to load cargoes for departure at ports. Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards.[17][18] This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.

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.[19]

Though rebounding to 2000 on 7 October,[20] by 3 February 2012, the index made a new multi-decade low of 647 on a continued glut of dry bulk carriers and decreases in orders of iron and coal.[21]

On 12 January 2016 the Baltic Dry Index reached the historic low of 402, presumably significantly below operating costs. This is what that looks like in the real world. 

North Atlantic Appears to be nearly DEVOID of Cargo Ships in-transit while world shipping fares little better. Worldwide, a visual inspection shows around half of cargo shipping capacity is sidelined, anchored and/or moored.

Cargo ships anchored and moored as of 1/12/16

Cargo and tankers Anchored and moored

Cargo ships underway as of 1/12/16Cargo and tankers underway

Commerce between Europe and North America as measured by cargo shipping is grinding to a standstill. It is just a matter of time, before the lack of raw goods input shows itself in retail and wholesale sales. The lack of sales revenue is guaranteed to appear in credit ratings, as defaults roll round, stressing the banks that made the loan. Should I say I told you so? Rewind three months back...

Those in the space that are concerned about the effect on banks should read our Pathogenic Finance report. Click the graphic below for a direct download:

thumb PathogenicFinance1.0a Page 01 

Read 2251 times Last modified on Tuesday, 12 January 2016 14:18
Reggie Middleton

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