The Baltic Dry Index

Crossposted from The Stars Hollow Gazette

The Baltic Dry 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 timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Since 1744.  Because Cargo Ships take a long time to build and are very expensive, capacity is relatively stable and rises and falls in the price are a leading indicator of Economic Demand for Raw Materials.

Handymax is the smaller sizes, Panamax is the largest size that will fit through the Panama Canal, Capesize are so large they have to sail around Cape Horn and the Cape of Good Hope.

Unlike stock and bond markets, the BDI “is totally devoid of speculative content,” says Howard Simons, an economist and columnist at TheStreet.com. “People don’t book freighters unless they have cargo to move.”

The companion index is the HARPEX which doesn’t have it’s own Wikipedia entry, but which measures shipments of cargo packaged in containers.  Some raw materials yes, but mostly manufactured items being transported for assembly and sale.  Your Foxconn iPhone came from China in one.

Last week Louis Basenese of Wall Street Daily (not Journal) published this piece that made some Economists nervous.

The Most Alarming Chart I’ve Seen All Week

Louis Basenese, Wall Street Daily

Published Fri, Jan 20th, 2012  

While (almost) everyone finally agrees that the United States has avoided a nasty double-dip recession, a slowdown’s brewing elsewhere in the world.

How can I be so sure? All I have to do is look at the latest chart for the Baltic Dry Index.

…

(T)he Index is down 48.4% in the last month. And it’s down 54.4% in the last three months.

The culprit? Why, Europe, of course.

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On Wednesday, the World Bank cut its world economic growth forecast explicitly because of Europe’s never-ending debt crisis. Meanwhile, as Europe’s debt crisis persists, Bloomberg reports that the IMF plans to cut its global growth forecasts, too.

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A recession is afoot, if not already underway.

And thus it has come to pass, exactly as predicted.

U.K. Teeters on Brink of Recession as King Signals More Stimulus: Economy

By Scott Hamilton and Jennifer Ryan, Bloomberg News

Jan 25, 2012 7:38 AM ET

The U.K. economy shrank more than economists forecast in the fourth quarter as manufacturers cut output and services stagnated, leaving Britain on the brink of another recession

Gross domestic product fell 0.2 percent from the third quarter, when it increased 0.6 percent, the Office for National Statistics said in London today. The median forecast of 33 forecasts in a Bloomberg survey was for a drop of 0.1 percent. Public-sector strikes over pensions on Nov. 30 had “some impact” on GDP in the quarter, the statistics office said.

Bank of England Governor Mervyn King said yesterday that policy makers can increase stimulus again if needed to guard against a “renewed severe downturn.” The U.K., the first Group of Seven nation to report fourth-quarter data, may not be the last to report a contraction. Germany’s statistics office estimated GDP fell about 0.25 percent in the period and the International Monetary Fund has forecast a euro-area recession.

That would be Mervyn King, Bank of England Governor.  Elizabeth Mountbatten is still preparing for her Diamond Jubilee and Prime Minister David Cameron’s idea of economic stimulus is to give her a $2 or $3 Billion Yacht she doesn’t need and says she doesn’t want.

Now the Wall Street Bull Shill Artists don’t like bad news getting in the way of their Ponzi schemes so there’s been some push back-

The Blame Game: Revisiting "The Most Alarming Chart I’ve Seen All Week"

Louis Basenese, Wall Street Daily

Published Fri, Jan 27th, 2012

Readers responded that I unfairly pegged the three-month, 54.4% drop in the Baltic Dry Index on Europe’s never-ending debt crisis. Instead, readers said I should have also pointed a finger at China.

Well, readers, I admit it: You’re right.

As I noted on Wednesday, China’s economy is decelerating. And as the biggest consumer of raw materials, it’s definitely having an impact on the Baltic Dry Index and global economic activity. In fact, the IMF cut its global GDP forecast this week from 4% to 3.3%.

Shame on me for not blaming China, too. Can you ever forgive me?

But wait!  It’s all about the Supply Side!

The supply of bulk ships only increased 8.9% over the last year and 2.8% in the last three months. Do you really think a 2.8% increase in supply is entirely responsible for a 54.4% drop in the Baltic Dry Index over the same time period?

Even if we look at the increase in capacity – which is up 12.7% in the last year and 3.9% in the last three months – there’s no way it’s the only factor sinking the Baltic Dry Index.

And how about that HARPEX?

In the last six months, the number of container ships only increased 0.3% and capacity only increased by 1.9%. Meanwhile, the HARPEX Index is down 46.9% over the same period.

Louis is not the only one noticing this.

Chart of the Day: The Baltic Dry Index

Sebastian Walsh, Financial News

25 Jan 2012

According to (Nick) Bullman (managing partner at risk consultant Check Risks), its initial collapse in October was driven primarily by a fall-off in demand from China, where declining housing prices pushed purchasing managers to cut back on orders for the raw materials whose transport the Baltic Dry Index reflects.

He said: “This collapse looks similar to the falls we saw in the Baltic Dry ahead of the recessions of the late 1970s and early 1990s – but this drop is actually steeper.”

…

“US unemployment is in high double digits at moment, not 9% – the way the US government collates the data means the long-term unemployed just fall out of the numbers.”

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Bullman said that shipping companies have also been deliberately slowing down their journeys to save fuel, with trips from China to the US going now taking around 50% longer than they were early in 2011.

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(H)e said he was surprised by how long the Baltic Dry took to fall.

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“What this is signalling is that the world economy is slowing down much more quickly than people have been thinking.”

Even if the problem is over capacity, this is not good news.

Business Insider quoted Basil Karatzas, the chief executive of Karatzas Marine Advisors, as saying European banks could face nearly $100 billion in losses to restructure the $500 billion in shipping loans on their books.

(h/t Lambert Strether @ Naked Capitalism)