Wednesday, August 26, 2009

Baltic Dry Index Continues To Fall As China Continues To Cut Back Its Commodity Purchases

On CNBC News: Japan Exports Dip, Stimulus Effect May Be Waning

  • Japan's exports fell in July from the previous month for the first decline in two months, in a possible sign that the impact of stimulus measures in major economies worldwide is starting to wane

The Baltic Dry Index closed lower yet again at 2388.

On Monday, 24 Aug, on WSJ journal : Shipping-Cost Index Drops

    LONDON -- The Baltic Dry Index, already down 26% this month, is likely to fall further during the rest of the quarter as
    China continues to cut back on commodity purchases.

    The BDI, a barometer of shipping costs for commodities such as iron ore, coal and grain, may rise in the fourth quarter as other major world economies are expected to increase imports. However, a record number of ships scheduled to come on line this year and in 2010 will keep freight rates under pressure even as the global economy recovers, analysts say.

    The BDI is often seen as a key leading indicator for global economic growth and production, and the August decline has been the sharpest since October's 72% skid, when freight rates were heading below break-even levels and the shipping industry was gripped with uncertainty.

    Friday, the index fell 2.6% to 2468, capping a 10% decline for the week and leaving it at a three-month low. The volatile index, which surged in the first half of the year on Chinese demand for iron ore and coal, is still about four times higher than December's 22-year low.

    Iron-ore imports to China were driven by the country's economic-stimulus package, in turn increasing demand for Capesize ships, the largest of the four vessel classes calculated into the BDI and the primary transport method for iron ore. In July, China imported nearly 55% of globally traded iron ore and about 10% of coal. This demand, as well as huge lines outside major ports that crimped the supply of available ships, helped elevate freight rates.

    "There is no doubt the last few months have been unprecedented and unsustainable when it comes to China's appetite for iron-ore imports," said Peter Hickson, UBS AG's managing director of global materials strategy.

    Some say that while forward prices already are pricing in a further slowdown in Chinese demand, they aren't taking sufficiently into account easing port congestion and the mass of new ships scheduled to roll onto the oceans this year and next. Some 1,000 dry bulk ships are expected to be launched this year, and another 1,000 are due in 2010, said Amrita Sen, a London-based analyst at Barclays Capital. In the past five years, the average has been 300 new ships.

    Forward rates for Capesize vessels are $37,000 a day for the fourth quarter and $29,250 for 2010. Friday, average daily rates for Capesize vessels fell below $40,000 a day for the first time since May. They had shot up to nearly $90,000 a day in June, from about $9,000 a day in January.

    "If anything, the forward curve is being a touch overoptimistic," said Richard Bowler, Citigroup director of commodities.

    Analysts say stronger growth from developed nations will be a key factor for rates next year. "For me, the next leg up is demand [from members of the Organization for Economic Cooperation and Development]," Barclays Capital's Ms. Sen said. "Unless you see that, [freight] rates will fall."

    Currently, there are few signs that demand for iron ore and other shipped bulk goods is turning around. In Rotterdam, Europe's largest port by volume handled, the volume of iron ore, also called throughput, was down 76% in the second quarter from a year earlier. Iron-ore throughput at Antwerp, Europe's second-largest port, collapsed 97% in the second quarter from a year earlier.

    "The situation [for iron-ore shipments here] could not get any worse," said Michel Moons, commercial manager of bulk at the Antwerp port.

    Port officials said that could change as steel mills rebuild stocks late this year in anticipation of economic recovery. Hugo du Mez, business developer of bulk goods in Rotterdam, said, "I do expect activity to pick up in the fourth quarter."

Hmmm... if economic recovery is to be believed why is China cutting back on its commidity purchases? Does China matter?