Wednesday, July 07, 2010

Baltic Dirty Tanker Index And Baltic Dry Index Plunging.. What Does It Mean?

The Baltic Dry Index has closed at 2127, down another 4%!

Remember it was just 4209 points on 26 May 2010. The Index is now down 2082 points or some 49.4%!!!

Now the has not been faring well too. The BDTI measures the oil tankers rates or the shipping costs on 17 crude oil tanker routes have not been doing that well too.

And again reports are saying that there are more very large supertankers (VLCC) for hire than there are for the demand to ship crude oil!

Here's a clip last month.

  • There are 5 percent more very large crude carriers, or VLCCs, for hire in the Persian Gulf over the next 30 days than there are cargoes that need shipping, according to the median estimate of three shipbrokers, one freight-derivatives broker and one owner surveyed by Bloomberg News today. (source: here )

And here is how the BDTI is faring the last 3 months.

And here is the comparison of the BDI versus BDTI on a YTD comparison.

Not looking great eh?

So is this an issue of over supply of ships? Or is this an issue of falling demand? Or a combination of both?

But the issue of over supply of ships is incredible, really.

For example: Samsung Heavy wins $1.7 billion shipbuilding deals

  • Samsung Heavy wins $1.7 billion shipbuilding deals
    (AFP) – 4 days ago

    SEOUL — South Korea's Samsung Heavy Industries Co. said Friday it had won deals worth 1.7 billion dollars to build 19 vessels, as global demand for new ships recovers.

    The country's second largest shipbuilder after Hyundai Heavy Industries Co. won a 1.03 billion dollar order from Taiwan's Evergreen Marine Corp., under which Samsung Heavy will build and deliver 10 container ships by November 2013.

    Samsung Heavy has also clinched another 670 million deal from two unidentified Asian shipping firms to build nine oil tankers.

    The two deals, signed on Friday, brought the total orders placed with Samsung Heavy to 51 ships valued at five billion dollars, accounting for 63 percent of the company's yearly target for orders.

    In contrast, the company received just one order worth 700 million dollars during the same period last year.

    South Korea overtook China to regain its status as the world's top shipbuilder in the first four months of this year thanks to a rise in demand from European shipping lines, the government said on Tuesday.....

And on the latest Korean Shipping messenger newsletter dated 6th July...

And on page 3 of the report...

  • .... But let's put it in perspective. This is nothing compared to the 95% drop the index saw before and during the financial crisis of 2008.

    And by and large, analysts are saying that we don't need to get too worried about this sell off either. Why not?

    The BDI measures the cost of shipping raw materials from one place to another. If the price of moving raw materials falls, then you'd assume that people are moving less stuff around the world. Presumably, that's because demand for finished goods is also slowing down. Therefore, a drop in the BDI suggests that the global economy must be slowing down.

    That's all very logical. But it misses one point – the supply side. Because it measures the cost of shipping, the BDI might also be saying that there are simply too many ships. The BDI hit a record high in 2008, as demand for shipping rose far ahead of the supply of ships available.

    So, as you'd expect, that meant that more ships were built. And fleets are still growing now, even although demand has fallen to more normal levels. More ships and static demand means shipping rates are falling.

    As dry bulk researcher Derek Langston of Simpson Spence and Young told the Financial Times last month: "We still anticipate this year we will see a record year in terms of annual growth of trade. However, this is also accompanied by record growth in fleet supply."

    So everything's just fine then? Well, we wouldn't go that far. Melissa Kidd at Lombard Street Research is rather less sanguine about the fall in the index. Sure, "the quality of the BDI as a leading indicator has been disrupted by an oversupply of shipping." But "the message of weaker global activity is supported by a range of other indicators."

    Chinese growth is slowing

    One big factor in the fall has been a drop off in Chinese steel mill demand for iron ore. Iron ore shipments fell year-on-year in both April and May, according to Bloomberg. Iron ore is of course, a key ingredient in steel manufacturing.

    But domestic steel prices in China have been falling for the past ten weeks. This is partly down to tighter monetary conditions. The construction industry is the major driver of steel demand. China's attempts to curb the property market have hit steel consumption and therefore prices.

    With iron ore prices remaining high, that's pushed steel makers into losses. As Andreas Vergottis at Tufton Oceanic tells Bloomberg, "Profitability of Chinese steel mills is zero now, we think."

    The trouble, says Kidd, is that "China has been the world's engine of growth for… commodities over the last 12-18 months. A cooling off in Chinese demand growth – prompted by ongoing monetary tightening – will impact heavily on global price developments" in the commodities market.

    And China's not the only one slowing down. "The JP Morgan Global Manufacturing PMI has fallen from a high of 60.9 in April to 57.0 in June." The reading for new orders was particularly hard hit, falling from 60.3 to 55.5 over the same time. "While a PMI of over 50 points to economic expansion rather than contraction, the drop in the index components points to a slowing down in the pace of recovery."

    A turning point for the global recovery

    What all this boils down to, says Kidd, is that "the global recovery has reached a turning point as the momentum provided by the inventory cycle wears off." In other words, company restocking is now ending, and we're waiting to see what sort of 'real' demand remains to pick up the slack once government stimulus is removed.

    Just how bad things get remains to be seen.
    But even a slowing of demand doesn't bode well for hard commodity prices in the second half of the year


random said...

but container rates are up.. now peak season

solomon said...

Moolah, is these BDI or BDTI can be traded as future contract? If yes, they might not be an accurate picture of the real economy because it can be a hedging instrument as well.

I guess the keyword now is "growing Consumption with manageable debts" both for consumer and government.

Moolah said...

Nope, they are not traded, which is why there is no volume in the charts.