Baltic Dry Shipping Index: If It Really Is a Proxy for the Economy, We're in Trouble

by: Michael Shedlock October 15, 2008    
Michael Shedlock

Michael Shedlock

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The Baltic Dry Shipping Index covers dry bulk shipping rates and some view it as a proxy for general economic health. The index continues to collapse.

Baltic Dry Index



Notice that the indicator is back at levels not seen since 2005 and is below levels seen in 2004.

Shipping Lines Tight

Bloomberg is reporting Shipping Lines Say Tight Credit Cutting World Trade.

Pacific Basin Shipping Ltd., Hong Kong's biggest dry-bulk carrier, and Precious Shipping Pcl. said demand for moving coal, iron ore and other commodities will fall because banks are guaranteeing fewer loads.

"Letters of credit and the credit lines for trade currently are frozen," Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. "Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay."

My Comment: Khalid Hashim has this backwards. Nothing is moving because demand is falling like a rock. Who in their right mind is not cutting back production in the face of the biggest consumer led recession in history?

The lack of letters of credit, in which banks guarantee payment for merchandise, could become a "big issue" for world trade, according to Klaus Nyborg, Deputy Chief Executive Officer at Pacific Basin. Tighter credit has contributed to this year's 80 percent drop in the Baltic Dry Index, a measure of commodity-shipping costs. About 90 percent of world trade moves by sea.

The Baltic Dry Index dropped 8.5 percent to 1,809 points yesterday, the lowest since August 2005. Pacific Basin dropped 6.5 percent to HK$4.75 in Hong Kong and Precious Shipping declined 5.5 percent to 12.1 baht in Bangkok.

Banks worldwide have curbed lending because of increased concerns about getting their money back. Shipowners are already struggling to obtain funding for new vessels. Precious Shipping took as long as 15 months to secure financing for 18 vessels it has on order, Hashim said.

My Comment: Those lending who are not extremely concerned about getting their money back are precisely the ones who will not get their money back

The maritime sector needs about $300 billion over the next three to four years to fund construction of vessels that are already on order, according to Nordea Bank Finland Plc. At least a quarter of container ships, dry-bulk vessels and oil tankers on order are not financed, according to Seaspan Corp., the Hong Kong-based ship lessor.

My Comment: The shipping sector is transitioning from huge undercapacity to overcapacity just as housing did in 2005. That is why rates are falling.

Note that the apparent shipping undercapacity was actually a mirage predicated on easy monetary policy by Central Banks, fueled by insanely low lending standards by banks. Artificial crack-up booms create the illusion of shortages and malinvestment of capital is always the final result. The new supply of ships coming out at exactly the wrong time is proof.

Swings in the London interbank offered rate, which lenders typically use as a base for writing new loans, have made it difficult to decide what price to charge new customers.

"The banks cannot fund at Libor rates at the moment," said Keishi Iwamoto, head of shipping for Asia at Sumitomo Mitsui Banking Corp. "The question is how do we tackle the additional costs for lenders."

German banks with funds to lend are offering about 200 basis points above Libor, double previous rates, while in Singapore the rate is plus-350 points, according to Tobias Koenig, managing partner of Koenig & Cie. In the main though, shipping lines aren't able to borrow, he added.

My Comment: For a detailed look at LIBOR conditions, please see LIBOR and the TED Spread Still Show Extreme Stress.

"There is no rate because all banks are closed for business," he said. "You have a few banks rescuing their best customers, but that's it."

"There is no rate because all banks are closed for business."

The smart banks should be closed for new business. I am sure there are some exceptions in medical businesses, bankruptcy related businesses, or small niche markets in other places, but for the most part, compelling banks to lend at bazooka point is exactly the wrong thing to do.

The US is in a recession, consumers are cutting back discretionary spending, there is rampant overcapacity in every sector but energy, and there is no reason to go on a lending spree. Furthermore, there is no reason for any qualified buyer to want to borrow. Why would any responsible party want to expand in this environment? The only people who want to borrow significant sums of money now are the very people banks should not want to lend to. Thus the best thing banks can do with that money is sit on it.

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This article has 10 comments:

  •  
    Oct 15 06:53 PM
    Completely disagree with your comments. Now is the time for anybody with a longterm view to be expanding. It is this very short sighted view that is the bane of the US economy.
    Reply | Link to Comment
  •  
    Oct 15 08:49 PM
    Contrary to previous comment, I think you are overall correct. Cargo Ships and incidentally offshore oil rigs are ordered at an insane rate for the last 2 years, creating a bubble and oversupply. Orders for steel and other commodities have been hit by a double whammy, slowdown in US and Europe due to the financial crisis and a drop in demand from China after the Olympics.
    Reply | Link to Comment
  •  
    Oct 15 11:35 PM
    I work in industry

    After 911 industry trended down for about a year, mothballed production and so forth and then industrial demand picked up considerably as the plants came back on line

    Land, labor, capital, technology and entrepeneurship are in a constant state of flux, sometimes there are long time lags but, demand postponed is demand pentup!

    I honestly thought high oil would diminish the length of the supply chain, ie more manufacturing in US, however as fast as oil spiked up, it spiked down
    Reply | Link to Comment
  •  
    Oct 16 02:03 AM

    The real trouble is in China.

    That is what Baltic Dry is really telling us.

    Chinese demand is imploding.
    Reply | Link to Comment
  •  
    Oct 16 12:50 PM
    i recently spoke with one source at a major retailer who told me that a disruption of somewhat indeterminate cause has occurred among overseas suppliers. this source thought that the letters of credit issue might be the problem. this retailer, however, said that they now expect to receive fewer goods than they ordered for the upcoming holidays (orders were placed long ago and the retailer did NOT cut back on the orders). the source did say that given the recent financial and economic turmoil, this is probably just as well for this holiday season, but the shortage relative to orders is not yet demand driven. just one data point, but it does not agree with mr shedlock's opinion.
    Reply | Link to Comment
  •  
    Oct 16 02:51 PM
    <b> Bold OFF! </b>

    I hope this works.
    Reply | Link to Comment
  •  
    Oct 16 03:42 PM
    gjg49: This from an article regarding Fortesque Mining:
    ----------------------...
    Concerns over demand for the ore were sparked last week after Australian rival Mt. Gibson Iron Ltd. reported Chinese customers asked it to postpone deliveries because of slowing steel sales and a lack of credit. Contract iron ore prices may drop 20 percent in 2009, the first decline in seven years, Patersons Securities Ltd. said in an Oct. 10 report.
    ----------------------...

    And <b> sM4r7Y_P4n7z <b> ..... It didn't work.....

    jegan ;-)
    Reply | Link to Comment
  •  
    Oct 17 07:18 AM
    Mike,

    Certainly BDI is showing slowdown. But isn't it possible that Khalid Hashi's comments also illustrate part of the problem? Wouldn't it just really suck if your readers took you completely at your word and ignored the (possible) reality that a monetary crisis was in the process of initiating a shipping halt? I wonder how many ships are being loaded with food and fuel destined for Icelandic ports at this very moment?
    Reply | Link to Comment
  •  
    Oct 17 11:37 AM
    I agree completely with Michael.

    The American Consumer, yours truly, is broke. With real incomes falling 5% over the past 8 years; job losses to China and India; fuel, taxes, and now food prices rising; housing doubling in cost... we are broke.

    We faked it for a while by borrowing against rising home equity, but with ARMs resetting and lost jobs, people were forced out of their homes, resulting in foreclosures and the collapse of home prices. I suspect the US unemployment rate is much higher than the stated 6%. And it does not reflect the underemployed, people who don't make enough pushing fries to live on, let alone do any 'discretionary spending'.

    Banks can't lend because technically, they are all bankrupt. The worst of the worst, Freddie and Fannie, have already collapsed. The rest have yet to restate the current values of their assets. Those assets (homes) backing up their home mortgages have dropped in value by up to 30%. And i suspect the bottom will be at 50%.

    For a bank like Bank of America with $1.75 Trillion in assets 30% could mean that they are short $600B. And until that hole is filled by new consumer deposits (Goldman Sachs is now accepting such deposits) credit is frozen. At its current rate of income, BoA will take ten years to fill that hole.

    A faster path to recovery would be for the banks to declare bankruptcy; re-organize minus those worthless securities and resume lending in a few months.

    But the extremely wealthy would lose trillions. And since they control the financial systems it's not going to happen.
    Reply | Link to Comment
  •  
    Nov 28 11:05 AM
    </b></b>&l...

    How about now?
    Reply | Link to Comment
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