The Fool's Game In The Baltic Dry Index

Did I mention that the Baltic Dry Index is soaring? I do hope that you are aware. :D

The Index rose another 2.398% or 61 points to close at 2605. I believe that this is the 11th week in a row that the index has risen.

With such an impressive surge, many as usual, are starting to make bold predictions. How to spot recovery in the world economy

• An overlooked barometer of economic activity is the Baltic Dry Index (BDI) which is a measure of the demand for shipping physical goods around the world, and hence it is a good gauge for world trade activity. The BDI is computed by The Baltic Exchange in London which grew out of the Virginia and Maryland coffee house in Threadneedle Street in 1744, where merchants and ship-owners would convey business.
  
  This index tends to be quite volatile because the supply of container ships is inelastic as it often takes a long-time for ships to be built to cope with a surge in demand. When there is a global slump this index will fall quite rapidly as experienced last year when this index dropped by a massive 96 per cent in 2008 from its peak value experienced during the previous May.
  
  The BDI per se is not a tradable index and is thus devoid of speculation, as well as political manipulation. It is thus a very objective measure of world economic activity when compared to other economic indicators. As at the close of business on May 7, it stood at 2194.00, up 21 per cent already this month and substantially up from its recent lows seen at the turn of this year of 773. It is slowly but surely beginning to literally swell up. It could well be that this is a true sign of economic recovery that President Obama has been remarking about. (See Bloomberg's charts for BDIY:IND Baltic Dry Index.)
  
  A potential way of following the returns on the BDI maybe to buy into an Exchange Traded Fund (ETF) that focuses on shipping companies. One such fund is the Russell Global Shipping Large Capital Fund (denominated in UK pounds) which is traded on the London stock exchange.
  
  Their index includes 29 securities from 12 countries which is rebalanced and reconstituted on an annual basis. However, this fund is currently heavily weighted towards shipping companies in Japan and USA, countries well down the league table of economic prosperity, which may mean this particular fund as it currently stands may take a long while to show signs of recovery. From the perspective of Australian investors there is also foreign exchange rate risk to consider as well in purchasing such ETF units. Without professional investment advice it is best advised to stay away from the stock market but nevertheless the BDI is showing positive signs of a revival.
  
  On the basis of the BDI recovering somewhat over the first quarter of 2009, it could well be that President Obama's assertion about the world economy turns out to be correct but the shipping lanes to recovery will remain choppy, hazardous but potentially rewarding. Ultimately, it could be our Australian merchant sea captains and not our captains of industry that spot green land ahead first.

Not all are convinced.

Here is an article published on Business Insider, Shipping Rates Are Lousy For Predicting The Economy (DRYS

• Because there is no way the BDI is a reliable leading indicator of much, if anything, let alone the stock market. If one wants to track commodities demand as a signal of the economy, just look at the actual nominal commodities demand. But before we go here, let's confront correlation studies such as the above and as frequently exist elsewhere.
  
  I have actually done a rather in-depth BDI correlation study in the past during my tenure as shipping analyst at Citi. One important thing to note about correlation is that you need to look at correlations for many different time periods because if you just calculate a single correlation then it will be highly dependent on your start and end dates. For example, in the Bespoke correlation above, they use a period where the US markets went up over 20+ years and when at the same time the BDI also went up. Surprise, surprise, the correlation is positive over this long period. But if you dig into the details, then one can find many examples where correlation was very negative, and to be fair they show this with their 2009 data. In addition to this, as I have found by doing correlation studies in the past on the BDI vs. shipping stocks in particular, the outcome for any sort of trading strategy based on correlation can differ greatly from your long term correlation. Correlations can reverse for long enough that you are wiped out if you follow some sort of period correlation trading strategy.
  
  Now to make things more clear, I think its even best to step back from numbers or historical correlations and think about some very important differences between the nature of the BDI and the nature of a stock price for a company or market. The BDI measures the rate to ship something around the world, ie. the COST to ship something around the world. On the other hand, the stock of a company represents ownership of a productive asset, a company. (well, at least usually they are productive!) A company is seeking ways to be more efficient, grow the size of its business and generally increase its value.
  
  What this means is that while shipping rates should track the cost to ship something around the world, which actually in the long term should be declining on a real basis due to human progress (and has been), a company (when managed properly), or collection of stocks, ie. a stock market, should actually be increasing in value over time on a real basis due to human progress. If we want to think about the value of all the companies in the world versus the cost to ship a ton of ore around the world, in the long term the value of global business will be increasing while the costs to float ore will be falling. For shipping costs to rise in the long term, humans would have to somehow become less and less efficient at transportation over time. Unlikely.
  
  Why do shipping rates seem to jump all over the place? Due to near term supply of ships versus demand for commodities. Its just a matter of bottleneck problems. If rates go up it can come from either of two things, not enough ships at the time or too much commodities demand at the time. In a situation where ship owners match demand, which over the long run they will, then rates won't sky rocket and will just track their costs plus some margin for their effort.
  
  Now in regards to the BDI as an economic indicator, and there are tons of similar views out there, I have just pasted an example below, where economist Susan Lee says the following..
  
  I suggest you watch an index that will tell you when the world economies are starting to perk up and when trade conditions are really starting to ease. It’s called the Baltic Dry Index. Essentially the Baltic Dry tracks the average daily price for shipping dry bulk like coal, iron ore, wheat and soybeans. There are three things that make it such a good leading indicator. One, the index looks at raw materials, so it captures activity at the very beginning of the production process. Two, it looks at ocean shipping, so it reveals what’s happening to international trade — the critical driver of global growth. And, three, the shipping business depends heavily on credit, so the Baltic Dry indicates whether credit is tight or loose. Back in 2005, when the world’s economies were just fine and credit was abundant, the Baltic Dry looked like a powerhouse. But it peaked in May of 2008. And it’s been heading almost straight down ever since — losing about 90 percent of its value.
  
  I don't mean to pick on the quote above alone, a lot of people are making the same argument, the quote above was just the most convenient at hand.
  But essentially one problem with using the BDI for economic forecasting is that the BDI could feasibly go up in an environment where commodities demand was shrinking, if the supply of ships was shrinking even faster. These would be negative economic factors. This is because the BDI's value is not solely driven from the demand side. To me, it makes far more sense to just look at nominal demand for commodities rather than the BDI since the BDI has the complicating factor of vessel supply growth one needs to consider. The other thing is that the BDI is a measure of spot rates for dry bulk commodities consumers who, generally, are in the near term forced to pay whatever it takes to get their raw materials shipped (A steel plant needs to keep operating despite some higher ore transportation cost). On the flipside, vessel owners are in a similar boat (no pun intended), and in the near term are generally forced to take whatever rate they can get to fill their ships. (A ship sitting around is just a cost, ie. fixed costs are high, thus using a ship at a loss is usually better than not using it at all)
  
  Because of these inelastic characteristics of supply and demand, and since the BDI is a measure of spot rates, the BDI is thus absurdly volatile. I can explain why via the following simplified example, which I used to use frequently at Citi.
  
  Imagine you have 10 loads of iron ore and 9 ships, and that every load of iron ore must be sent no matter what while every ship must be filled no matter what. Imagine the bidding war between those 10 iron ore consumers fighting over just 9 ships. Shipping cost would skyrocket since they all need to ship regardless of cost. Now imagine if a week later two more ships enter the market. Now imagine the bidding process. Suddenly the tables have completely changed. You have 11 ships, that all need to be filled no matter what, and only 10 loads of ore. Shipping rates would plunge, despite a period of just a week passing by. This is, in a simplified nutshell why the BDI is so volatile.
  
  Now, add to this the fact that predicting ship supply and commodities demand has a pretty high margin of error, at the same time remembering how sensitive the BDI is to small mismatches due to the inelastic nature of its underlying supply and demand, and you quickly realize that predicting the BDI is a fool's game and also that it is not a reliable forward indicator given that it is a spot rate index in a market where both sides are basically forced to close a deal due to high fixed costs. The BDI is measure of supply/demand mismatch at the moment, and can change drastically on a dime. Its little else beyond this. It hit its peak not when the global economy was in its healthiest state, but in early 2008 when things were already starting to come apart, but Chinese commodities demand growth still had some steam and just kept outstripping stagnant vessel supply growth. For a moment. And then it all collapsed. And BDI correlators got annihilated in popular stocks such as DryShips (DRYS). Thus, let's hope that we put to rest any talk of the BDI as a reliable leading indicator, even if in six months someone datamines some new, latest correlation.
  
  This post originally appeared at Reserach Reloaded.

Great stuff.

Some would even highlight the iron core issue. Everyone knows China is buying iron core. However, some would question if the iron core imported is nothing but plain inventory purchases.

Another update on Maybulk

Here's an update on Maybulk.

Previously, I had posted on the Regarding the Dry Bulk Shipping Sector, in which I had made an update on it here: Update on the Baltic Index.

I then had highlighted the sharp decline on Maybulk on the posting, Maybulk And The Baltic Index.

This morning, OSK released a report on Maybulk, acknowledging the sharp decline on the Baltic Dry Index but reckons that it's just a temporary blip!

Here is the snippet of what's being said in the report.

• Malaysian Bulk Carriers
  Between a Rock and a Hard Place
  
  BUY Maintain
  Price RM3.94
  Target RM5.90
  
  The recent sharp drop in the BDI according to sources has been attributed to protracted iron ore price negotiations with buyers and sellers supposedly keeping away from booking ships to create opposing perceptions of a shortage in demand and supply. We expect the BDI to rebound sharply in May when negotiations are resolved. For now, even at current levels, shipping rates are excellent when compared to historical averages. We downgrade our earnings for MBC slightly to account for recent BDI volatility but the company remains a Buy with 49% upside.
  
  Sharp drop in BDI. As the BDI had exceeded expectations on the way up, so too has the severity of its fall. Share prices of dry bulk shipping companies have retraced together with the BDI and MBC is no exception.
  
  Probably due to iron ore price negotiations. Indications from industry sources are that iron ore sellers may be holding back cargoes and buyers may be holding back orders as both sides negotiate on the new iron ore prices for the shipping year beginning 1st April 2008. Sellers were reportedly looking for a 50-70% hike while buyers were only keen on accepting a 20-30% hike. The current high price of coal has also led to some parties holding off new orders until February.
  
  Temporary blip in the BDI. Indications point to demand for iron ore from Chinese steelmakers still being strong and it appears only a matter of time before ore prices are agreed upon and shipping orders come flooding back into the market. Freight forward agreements, which show an uptick in May, seem to support this view.
  
  Rates at this level still very profitable. Even at below the 6500 pts level, the shipping rates that dry bulk ships will enjoy is still very good. To note that Panamax and Handymax rates have held better than for Capesize vessels.
  
  Still a Buy. Undeniably, sentiment on MBC has been hit by the sharp slide in the BDI. But with the BDI expected to rebound in May, an excellent set of earnings and a bumper dividend to be announced in February, we maintain a Buy recommendation on MBC. We have tweaked our earnings down by 2% to account for BDI volatility and our fair value is adjusted down to RM5.90.

Now, here's an issue not to be discounted. The BDI has dropped a 37% Since Mid November! And in OSK report, it said they had 'tweaked our earnings down by 2%' to account for the BDI volatility.

Just 2%?

Anyway, here is the earnings tables from OSK.

Now if you look at the 2007F and 2008F forecast numbers, don't you think that OSK is still extremely bullish on the stock?

The Clear Underperformance of Maybulk when compared to other BDI Shippers

My dearest Jamesy or otherwise known as James Bull has left me an very interesting comment on "Dryships, Maybulk and Dry Baltic Index (BDI)":

Actually i wanted to show the comparative performance for bdi shippers but i had a difficulty to upload it yesterday.Here is the comparative performance since Feb08, where BDI rebounded from its bottom: ttp://img98.imageshack.us/img98/4540/comparativeperformance1iu1.gif

Here is the comparative performance since April08, where BDI rebounded from its higher low: http://img98.imageshack.us/img98/8214/comparativeperformance2zj8.gif

As usual, our kampung saham always has tendency to be a lagger, and that make us unique :D

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

And here is the bigger picture of what Jamesy is saying to me. ( I took out the other shippers mentioned by Jamesy because there are rather smallish shippers. )

The comparison of BDI Shippers since Feb 08.

The comparison of BDI shippers since April 08.

As pointed out by my dearest Jamesy, it's rather so clear that Maybulk has been a terrible laggard when compared to other BDI shippers.

And this is where it gets tricky, if you ask me.

In my honest opinion my dearest Jamesy, if you strongly believe that the current situation where Maybulk is underperforming other BDI shippers, equates to a buying opportunity and that there should be no reason why Maybulk should not move in tandem with other BDI shippers, then this is where the issue of trust is so very important.

I had actually made a rather short note on MooTakTrade yesterday called Eternity

• "A man must think for himself, must follow his own convictions...Self-trust is the foundation of successful effort."

Of course, it's so important that one needs to understand that own owns convictions needs to be spot on in the very first place and blind self convictions can equally kill when one fails to acknowledge one's own short comings.

So do you trust your reasoning that the current situation represent an opportunity?

If so... trust is indeed a must, yes?

Baltic Dry Index Ends Lower And CIMB Expects BDI to Average 2500pts for 2010

The Baltic Dry Index closed much lower again. Second down day for the index - ending the previous 7 days of advances.





CIMB Research had a report out on the Dry Bulk Shippers yesterday and they are underweight for the sector.

• Price arbitrage favouring commodity imports explains BDI increase. The substantial rise in the Baltic Dry Index over the past six months, despite global weakness in steel production and electricity demand, has been driven singlehandedly by China. As freight-inclusive cost of iron ore and coal imports fell below domestic alternatives from the start of 2009, Chinese steel mills and independent power producers accumulated significant amounts of foreign ore and thermal coal. In 4M09, China imported 22.9% more iron ore even though crude steel production rose a mere 0.7%. China also purchased 71% more coal from Australia and Indonesia during 5M09 even though electricity production fell 4% yoy.
  
  • Are we past the year’s peak? However, the tsunami of imports may be coming to an end. Adding the rise in the fob prices of commodities and the more expensive freight, the cfr prices of imports have now closed the gap with domestic Chinese prices and are now more expensive in some cases. If this situation prevails, we expect Chinese buyers to return to domestic sources and reduce their imports. This could cause the average BDI for 2H09 to be lower than in 1H09.
  
  • 10% hoh capacity growth in 2H may be possible. With freight rates now comfortably above breakeven operating costs, dry bulk owners are likely to accept newbuilding deliveries rather than defer them further, especially since the majority of 2009 orders may have already been financed. We expect capacity growth of about 10.2% hoh in 2H, against just 3.1% growth in 1H. This could result in a moderation of the BDI levels over the next six months.
  • Maintain UNDERWEIGHT on dry bulk shipping. We believe that the odds of a correction in the BDI in the next six months are significantly higher following the convincing rise in cfr import prices over the past few weeks. We are currently forecasting the BDI to average 3,000 points in 2H09 vs. more than 4,000 points currently and an average of 2,000 points in 1H. This will take our full-year average to 2,500 points, up from our previous forecast of 1,000 points. For 2010, we expect the BDI to also average 2,500 points (previous forecast 1,200 points) while for 2011, we are retaining our forecast of 3,000 points. According to Imarex data, the BDI futures for 3Q09 is priced at 2,825 points, which is 31% lower than the current level, while the futures curve for 4Q09 is priced at an even lower 2,350 points.
  
  • We are retaining all our Underperform recommendations except for Pacific Basin which we downgrade from Neutral to Underperform. We will revise our earnings forecasts for the new BDI expectations after going through a comprehensive review. We expect TTA and Pacific Basin to be profitable in CY10, against our current loss forecast, while PSL should see higher profits and STX lower losses. We do not anticipate a change in our recommendations. Our target prices remain intact for the time being. We believe that stockmarket valuations have priced in significant positives for the dry bulk sector. Investors should take profit before the expected moderation in China’s commodity imports in 2H09.
  
  

oO .... look at CIMB's target price for Maybulk!

Here is how Maybulk is doing.

Not looking too sharp and perhaps taking profit instead of selling at a loss would have been a smart option the other day!

How now my dearest Moo Moo Cow?

:D

Dryships, Maybulk and Dry Baltic Index (BDI)

January 8th 2008.

That was when I was blogged on the Baltic Dry Index: Regarding the Dry Bulk Shipping Sector

One of the stock that was featured by Ms.Teresa Lo, from Invivoanayltics.com (see dry bulk shipping industry ) was DryShips.

A month later, I had made another update. Update on Baltic Dry Index

• Since the Baltic Dry Index has recorded some decent recovery (see most recent quotes above), I only think that it's appropriate that I also make an update on my past BDI postings ( Regarding the Dry Bulk Shipping Sector., Maybulk And The Baltic Index and Another update on Maybulk ).

And by March 8th, I had posted yet another update. Do They Know It's Christmas Time for ...

• Yes, since hitting the peak, the index for the Baltic Dry Index had tumbled. And as stated precisely, cargo shipments were indeed impacted by bad weather condition (severe snow storms in China to be precise) and this had put a huge damper in the charter rates. However, at this moment of time, this has clearly passed. The charter rates had certainly rebounded extremely strongly and as can seen above, the BDI closed at 8536.
  
  Yes, the plunge of the BDI from 11k has spooked the shipping shares. The index fell to a low of a 5615 on Jan 29th 2008.
  
  But the BDI is now at 8536!
  
  Oh, that's a recovery of some 2921 points or a whopping 52% from its Jan 29th lows!
  
  How?
  
  Do you reckon that Maybulk, whose earnings depending heavily on the index, should rate much higher?
  
  Ah yes, if you read Maybulk's earnings, there's a proposed 30 sen dividend. And if you use historical fiscal years as an indicator, Maybulk's dividend should go ex in April and payment would be made in May.

And here is latest update for the BDI.

Yes the BDI is now 10,354 pts! Which means the BDI has recovered an incredible 84% since its lows in January 2008.

And the following shows the trylu amazing recovery of the Index.

Why the sudden spike in this Baltic Dry Index? (Note this is just an index and it's not a tradeable thingee!)

The following Bloomberg News article offered some clues: Shipbuilding Torpedoed by Subprime Causes Cost Surge

• ``Cancellations would certainly be bullish for rates because the ships won't be there,'' Natasha Boyden, an analyst at Cantor Fitzgerald in New York, said.


• Freight rates have risen as fewer vessels have been delivered. The Baltic Dry Index, a measure of rates, has risen 58 percent in the last year as an index tracking the number of cargo ships under construction has fallen 21 percent in that time, using Lloyd's Registry Fairplay data.

And other shipping giant such as Mitsui OSk is feeling really bullish. Mitsui O.S.K. to Beat Profit Forecast on Higher Rates

• Mitsui O.S.K is benefiting from China's demand for iron ore as the country builds more cars, ships and factories. China's economy grew at the fastest pace in more than a decade last year and the country's imports of iron ore jumped 17 percent, the China Metallurgical Mining Enterprise Association said in April.
  
  ``Given the increase in rates, it wouldn't be unusual to see profits come in higher than forecast,'' said Osuke Itazaki, an analyst in Tokyo at Credit Suisse Group.
  
  Mitsui O.S.K rents 22 of its 100 large so-called ``capesize'' vessels at daily rates. It can quickly raise prices for those ships in response to fluctuations in demand. The other ships are contracted out for longer periods with fixed rates.
  
  The Baltic Dry Index, a measure of commodity-shipping rates, last week rose to the highest this year. It rose 53 percent to 10,220 in the past 12 months and touched a record 11,039 in November.
  
  `Strongest' in History
  
  ``The strongest dry-bulk commodities market in history is extending this run of higher prices,'' said Yonetani. ``Operating profit is likely to exceed our expectations.''
  
  The company plans to add 53 iron-ore carrying ships to its fleet over the next six years, it said today in a statement. Mitsui O.S.K. currently operates 125 such ships and plans to retire some of the older vessels. It had 364 bulk commodity ships in its fleet at the end of March.

And over in Thailand, folks are getting bullish on Brokers bullish on Thoresen Thai (note this a current news!)

• Given the level of the Baltic Dry Index - now above 10,000 points for the first time since December - and strong demand for dry bulk shipping, most brokers have recommended "buy" on Thoresen Thai Agencies' stock.
  
  Of 20 brokers in the Securities Analysts Association's consensus, 14 brokers recommend "piling up" TTA's stock, four brokers recommend "trading buy", while one each advises" hold" and "sell". The target price in the consensus ranges between Bt48.50 and Bt79 per share.
  
  TTA is Thailand's largest dry bulk shipper, owning 45 general cargo vessels and bulk carriers as at the end of last year. It has expanded into offshore oil and gas-related services through its subsidiary, Mermaid Maritime, which owns four offshore supply and support vessels and two tender drilling rigs.

Now let's our leading dry bulk carrier stock, Maybulk Carriers.

Firstly, the chart had been adjusted to account for the 30 sen dividend that was paid in late April.

Maybulk last traded at 4.26 and if you use the January low of 3.50 as the low, the stock had appreciated some 76 sen. Adding back the 30 sen dividend, this would mean that the stock has appreciated by some 30%.

Now let's compare Maybulk's performance to Dryships performance.

Back on Jan Dryships was trading at 52.18. It closed at 98.40 yesterday. Dryships has increased by a whopping 88.5%! (Which is about correct when one consider that BDI had increased some 84%) ( Dryships was also blogged by Chris Perruna,DryShips (DRYS) Drying up?. )

The below chart shows the incredible disconnect between Maybulk's performance and Dryships performance.

So why is Maybulk so under performing?

Is there something wrong with Maybulk?

Why is Maybulk being ignored by our local market?

How now my dearest MooMooCow?

Baltic Dry Index Set For Strong Recovery???

Here are some rather optimistic comments and views on the Baltic Dry Shippers: Baltic Dry Index in for strong recovery

• THE Baltic Dry Index (BDI) is expected to make a strong recovery despite its sharpest fall this year that has spawned fears that it might be the beginning of the dry bulk shipping downfall.
  
  The BDI covers dry bulk shipping rates and is managed by the Baltic Exchange in London.
  
  According to the Baltic Exchange, the index is an assessment of the price of moving major raw materials by sea.
  
  Based on dry bulk shipping routes measured on a time charter and voyage basis, the index covers Supramax, Panamax and Capesize dry bulk carriers carrying a range of commodities, including coal, iron ore and grain.
  
  After reaching an all-time high of 11,793 points on May 20, the BDI took a major dive of 39.4% to 7,147 points on Aug 22.
  
  This has raised concerns that the sector could be affected by a drop in demand for iron ore from China post-Olympic period as well as the ease in congestion at major coal ports in Australia.
  
  At Newcastle Port, the world’s biggest coal-export harbour, there were 27 vessels off the port waiting to load 2,498,386 tonnes of coal for the week ended on Aug 25.
  
  In the first quarter of this year, the average number of vessels waiting outside the port to load coal was 33.
  
  The concern might be a false alarm as at above 7,000 points, the BDI can be still considered healthy compared with the lowest level recorded last year at 4,219 points on Feb 1.
  
  The lowest level of BDI recorded this year was 5,615 points on Jan 29.
  
  China factor
  
  According to OSK Research Sdn Bhd associate director Chris Eng, the fears of the collapse of the drybulk sector might be overblown as China’s economy will not be overly affected after the Beijing Olymipcs.
  
  “We observed that China’s economy actually slowed down during the two week-long Olympics due to factory closures around Beijing to reduce pollution as well as the host nation’s preparations for the games.
  
  “The drawdown on China’s iron ore inventory during the past two months also led to a drop in demand for dry bulk shipping,” he said in the recent Malaysian Bulk Carriers Bhd (Maybulk) report.
  
  Shipbrokers now expect the end of the Olympics would herald a pick up in China’s economic activities while the halt in inventory drawdown would see demand soaring for iron ore shipping.
  
  “In fact, the recent upturn in the Capesize vessel freight rates seems to confirm this view, as Capesize vessels are back in demand.
  
  “Also, the grain exporting season in the eastern Mediterranean has led to a resurgence in demand for Supramax vessels.
  
  “Although we see China’s economy slowing down next year, growth will still be strong at above 8% and this will help sustain dry bulk shipping demand growth at 5% to 6%,” he said.
  
  Oversupply of ships?
  
  Eng said the issue of an oversupply of drybulk vessels was also not a cause for concern.
  
  “We noted that the dry bulk fleet order book is currently 61% of the current fleet, which is high by any measure.
  
  “Nonetheless, about 69.6% of the order book is actually scheduled for delivery in 2010 and beyond,” he said.
  
  Some quarters had also highlighted the large number of Very Large Crude Carriers (VLCCs) that are scheduled for conversion to Very Large Ore Carriers (VLOCs) that would boost the supply of dry bulk ships.
  
  Some 25 tankers had supposedly been converted year-to-date.
  
  “With a capacity of 200,000 deadweight tonne (dwt) per VLCC, the 25 tankers will translate into 1.2% of the current fleet, which is hardly a cause for concern,” Eng said.
  
  He said the recent cancellation of orders received by South Korean shipyards had again raised fears that there would be a significant rise in the number of cancellations for new ship orders.
  
  “We, therefore, concluded that the bulk of the new ships will come onstream only in 2010 and beyond.
  
  “There is also a possibility that a large number of these ships will not be delivered on time due to cancellations related to the global liquidity crunch,” he said.
  
  Eng said the fleet growth this year would only average 6% to 8%.
  
  “While growth may accelerate past 2010, scrapping of ageing dry bulk carriers will intensify if the BDI falls to below 5,000 points,” he said.
  
  Longer journey
  
  According to Kenanga Research in its recent Maybulk report, higher tonne-mile effect would buoy dry bulk rates as China started importing more iron ore from Brazil when iron ore price negotiation with Australian miners stalled.
  
  “The tonne-mile effect has a significant impact on bulk rates as distance from Brazil to China is three times the distance from Australia to China.
  
  “The price negotiation was finally settled in June when Baosteel Group Corp in China agreed to an overall 85% price increase for Rio Tinto’s iron ore,” said the report.
  
  Rio Tinto is a leading international mining group.
  
  The report added that it expected the BDI to make a strong comeback post-Olympics when steel mills and plants re-commence operations.
  
  In addition, the BDI should also be driven by the peak US grain export period in fourth quarter.
  
  The report said it continued to be positive on dry bulk for the rest of this year and believed dry bulk shippers could register another record profit year.
  
  Higher profits
  
  Maybulk is a prominent Malaysian company in the dry bulk shipping business.
  
  The company posted a net profit of RM314.2mil for the first six months ended June 30 (H108) – up about 15% against the same period last year – while group revenue grew 44.5% to RM366.5mil.
  
  Maybulk sold a bulk carrier and a tanker in the second quarter ended June 30 that contributed RM144.4mil to its operating income.
  
  The company plans to maintain its current fleet of 11 bulk carriers and three tankers.
  
  Meanwhile, Hubline Bhd, a relatively new player in the drybulk market, posted a net profit of some RM22mil for the first six months ended March 31. This represented a 49.7% growth compared with the same period last year.
  
  In addition to its container shipping services, Hubline ventured into the dry bulk shipping sector after acquiring a controlling stake in Miri-based Highline Shipping Sdn Bhd, a dry bulk cargo shipping company, in March last year.

Just for the record, BDI last closed at 6809 pts.

Here are some of the recent blog postings.

• 1. The Collapse of the Baltic Dry Index
• 2. Goldman Downgrades Bulk Shippers!
• 3. Baltic Dry Index Keeps Falling!
• 4. Baltic Dry Index Stages Strong Rebound!

The Baltic Dry Index Keeps On Plunging!

Woah!

The Baltic Dry Index keeps on plunging!

The Index closed at 5,874 down some 272 points or 4.4%!

Published on Forbes, Dry Bulk Hits Troubled Waters

• Dry bulk shipping stocks have been on the rocks recently as the rising dollar and declining commodity prices create the perfect storm for investors.
  
  It doesn't help that worries about a global economic slowdown, especially in China and Europe, and lower steel prices in China have cut into demand for shipping in the near term.
  
  Even the generally optimistic shipping analysts are sitting up and taking notice. On Wednesday, Lazard Capital Markets analyst Urs Dur downgraded Eagle Bulk Shipping (nasdaq: EGLE - news - people ), Genco Shipping and Trading (nyse: GNK - news - people ) and Navios Maritime Holding (nyse: NM - news - people ) to "hold" from "buy," despite the fact that their earnings to yield outlook is unchanged and they have little exposure to BDI weakness.
  
  It doesn't help that Chinese iron ore inventories are increasing, while steel prices decline. Dur said that Chinese iron ore inventories at its ports increased last week to 64.8 million tons, the highest level this year, with an estimated six-to-eight-weeks supply from 40 million tons at the end of August 2007. Even though steel production in China has increased more than 11% this year and China's reliance on imported iron ore needed to produce that steel has increased 20% year on year, Dur said "declining steel prices and increasing steel inventories indicate softening near-term demand for spot Capesize ships in the near term."
  
  Dahlman Rose analyst Omar Nokta said that there are conflicting reports about a rumored iron ore price hike by Vale. Chinese officials have said Vale sent notification to Chinese customers of an additional 20.0% point increase to the initial 65% to 71% price increase for iron ore fines, although Vale has not confirmed the change, he said. These rumors are "clouding the outlook for the market," although he warned that if there were a price hike it "would have a near-term negative impact and explain the violent moves down over the past three days."
  
  While analysts have been debating over the last few weeks when the dry bulk shippers will see a turnaround, Dur says that the Baltic Dry Index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, will likely weaken further in the near term. Even though the BDI still remains at record levels, the supply of Capesize and Panamax ships in the Pacific basin has been increasing, he said, bringing down prices.
  
  The dark cloud for dry bulk is that Dur expects spot Capesize rates to drop below the $90,000 per day mark by Friday, $4,000 less than Thursday. He also forecasts the BDI is likely to decline another 5% to 10%. Since the dry bulk stocks tend to trade with the BDI, or at least closely, Dur says, "downward pressure on the BDI does not cultivate a buying environment."
  
  
  The good news is that Dur thinks the BDI and the global economic outlook will improve in the fourth quarter.

Published on Financial Times. Chartering slowdown affects index

• The fall in the Baltic Dry Index from its record May high point reached 50 per cent Thursday on lower raw materials demand and more vessels available.
  
  The drop in the global benchmark for the cost of shipping commodities such as iron ore and grains came amid a slowdown in global economic activity and a broad sell-off of commodities.
  
  However, analysts and brokers said the fall in the index was also related to specific factors in the shipping industry, such as the seasonal slowdown in grain trading in the Atlantic in advance of the harvest.
  
  The index dropped Thursday 4.4 per cent to 5,874; the lowest level since late January, widening its slide from an all-time high of 11,793 to 50.2 per cent.
  
  Peter Norfolk, of London-based shipbrokers Simpson Spence and Young, said the market was experiencing a “real slowdown in chartering activity”.
  
  But Mr Norfolk and others said they expected a rebound in freight costs later this year.
  
  In the Forward Freight Agreements over-the-counter futures market, prices for December are above current spot quotes, suggesting charterers are expecting a rebound, although not back to the levels that were reached in May.
  
  James Leake, of Icap Shipping, said the recent fall in the Baltic Dry was not the end of a booming period for the sector.
  
  “We forecast a rebound in freight costs from November onwards on higher imports to China and a seasonal bounce back in grain activity in the Atlantic basin,” he said.
  
  Brokers said the current slowdown was the product of fewer iron ore imports by China, partly as result of heavy industries closures during the Olympic Games, but also in response to the lower overall steel demand by the country.
  
  In addition, congestion at important ports in Australia, Brazil and China had eased during the last two months.
  
  Mr Norfolk said 11 per cent of the world’s Capesize ships, some of the largest bulk carriers, were tied up in ports, down from 15 per cent in the summer.

And on Lyold's List, slack demand was mentioned. http://www.lloydslist.com/ll/news/slack-demand-wipes-out-50-of-bdi-value/20017567717.htm

• THE Baltic Dry Index has lost more than 50% of its value in just under four months, falling to 5,874 today as limited demand fails to absorb an oversupply of tonnage.
  
  The BDI, which is a benchmark measure for the dry bulk market, hit an all-time-high of 11,793 on May 20, but has since fallen close to a year low of 5,615 on January 29.
  
  The dry bulk markets have tumbled in all sectors as a lack of fresh inquires, particularly from China, have failed to absorb an excess of tonnage.
  
  China, usually a major importer in the dry bulk markets, slowed its activity ahead and during the Olympic games last month. This dampened market rates, although at the time there still remained an expectation that rates would rebound post-games.
  
  This rally in demand has so far failed to materialise and as such owners have been unable to halt the decline in rates.
  
  The capesize average time charter rate today was $85,862 per day, down $8,163 from yesterday.
  The average time charter rate has now lost a massive $148,126 since it hit an all-time-high of $233,988 per day on June 6.
  
  One London market source even held out the prospect of rates falling as low as $65,000 per day before it finds a level and bounces back.
  
  Some market watchers are still holding out hopes for a fourth-quarter rebound in rates, even if expectations have now been lowered.
  
  Another London broker said high iron ore stocks held at Chinese ports was at the “root” of the decline in rates.
  
  China has more than 70m tonnes of iron ore held at major ports.
  
  The broker added that he did not expect rates to rebound next week as there were still quite a few ships to “hoover up”.
  
  Owners, particularly in the Pacific, are feeding too much tonnage into the market, the broker said.
  
  Forward freight agreement brokers last week said that if the physical market failed to rebound either this week or next, then dry bulk derivatives contract levels for the fourth quarter could crumble.
  
  The capesize fourth-quarter contract was today trading around $123,500 per day, down from $143,500 on Monday.
  
  In the Atlantic, panamax owners have struggled to find support in rate levels, despite showing some resistance towards the end of last week.
  
  The panamax average time charter rate today was $47,670 per day. Meanwhile the panamax fourth-quarter FFA contract today was trading around $57,750 per day.
  
  For those traders taking a punt at this level, the spot market rate would have to increase by around $10,000 per day in September to justify the position.
  
  The capesize spot market rate would need to rise by nearly $40,000 per day to justify the premium of the FFA contract rate.

How now brown cow?

Still blame it on the Curse of the Cow?



Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???
6. Baltic Dry Index Plunges To Seven Month Lows!

Baltic Dry Index and Maybulk Again.

On Feb 13th 2008, I blogged the following: Another Update on Baltic Dry Index

What interest me the most was the chart of the BDI then. BDI on that day was at 6712 points. See below:



And on that day, the leading BDI stock in our market, Maybulk, was at 3.98.

So how is BDI doing now?



BDI closed at 8403!

Here is the incredible one month chart of the BDI.



Let's see on Feb 13th, BDI was at 6712. it's now at 8403.

Oh.. it's up only some 1691 points.

And Maybulk now is at 4.02.

Up a mere 4 sen from Feb13th 2008????

Macam Mana Ni?

Rational or Irrational?

Saw this set of commentary.

• Baltic Freight Rate Gain Supports Commodities Story
  
  FN Arena News - March 07 2008
  
  By Chris Shaw
  
  Having hit a low in late January the Baltic Dry Index, which is an indicator of the cost of moving raw materials by sea, has run significantly higher, hitting a level this week up more than 45% from those lows earlier in the year.
  
  According to TD Securities global strategist Stephen Koukoulas the fall in January was nothing more than a seasonal blip, a view supported by the fact the index is now up around 300% from its lows of 2006 and around 860% from its lows of 2001.
  
  This has important implications for commodity prices as the index is seen as a reasonable proxy for commodities demand and the latest gains in the index suggest there has been little sign of any slowdown in the global demand for commodities and by extension, global economic activity.
  
  This implies global growth rates should remain at solid levels despite the recent volatility in financial markets, which Koukoulas suggests will also mean the current inflationary pressures evident in a number of economies around the world are unlikely to go away any time soon. ( http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=868B898C-1871-E587-E1A46D8B77BB2002 )
  
  
  

Do They Know It's Christmas Time for ...

The BDI closed at 8536, up another 1.58%!



And yet the leading stock, Maybulk, in this sector has done absolutely nothing!

Maybulk closed yesterday trading flat at 4.10.



Truly amazing!

Well is this an opportunity or is this an trap? Trap? The below is a snapshot of Maybulk's segmental earnings.



How?

Interestingly enough, if one reads the earnings notes, this was what's said by the company in regards to the company's future prospects.

• PROSPECTS
  
  Since achieving a historical peak of 11,039 on 13 November 2007, the BDI has declined by more than 30%. Charterers’ suspension of cargo shipments in an effort to reduce port congestion, bad weather closing ports and mines affected cargo availability. Furthermore the annual iron ore price negotiations between China and the major suppliers resulted in significant decline of iron ore shipments. These adversely affected the cape-size market and the resultant negative influence across the freight market. However, the declining BDI against the backdrop of a global weakening equity market, the subprime mortgage woes, a tightening credit market in reaction to the subprime crisis and heightened concerns over the state of the United States’ economy is clearly exacerbating the negative market sentiment....

Yes, since hitting the peak, the index for the Baltic Dry Index had tumbled. And as stated precisely, cargo shipments were indeed impacted by bad weather condition (severe snow storms in China to be precise) and this had put a huge damper in the charter rates. However, at this moment of time, this has clearly passed. The charter rates had certainly rebounded extremely strongly and as can seen above, the BDI closed at 8536.

Yes, the plunge of the BDI from 11k has spooked the shipping shares. The index fell to a low of a 5615 on Jan 29th 2008.

But the BDI is now at 8536!

Oh, that's a recovery of some 2921 points or a whopping 52% from its Jan 29th lows!

How?

Do you reckon that Maybulk, whose earnings depending heavily on the index, should rate much higher?

Ah yes, if you read Maybulk's earnings, there's a proposed 30 sen dividend. And if you use historical fiscal years as an indicator, Maybulk's dividend should go ex in April and payment would be made in May.

Baltic Dry Index Plunges To Seven Month Lows!

Blogged on Monday, the very optimistic article on the BDI, Baltic Dry Index Set For Strong Recovery???

Just for the record, BDI closed at 6809.

Here are some of the recent blog postings.
1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???

Well the Baltic Dry Index has now plunged the past two days since that rather optimistic article.

And My Dearest Naruto, NO I DID NOT CURSE THE BDI!!!

The BDI closed at 6146!

And here is how the BDI has performed the past one year.

Let's be fair to our so-called local analyst. He was not the only one that was bullish. Business Standard too had released an article on the shipping industry, Better times ahead?, on Sept 1st 2008.

• Weakening of freight rates is a short-term phenomenon that will impact the shipping sector. But, healthy demand and supply bottlenecks will ensure stable growth for companies in this sector.
  
  A slowdown in consumption due to a weakening global economy has resulted in a drop in demand for shipping services. This, coupled with fears of a supply overhang, has led to a steep decline in freight rates for tankers which transport crude and oil products as well as cargo carriers that deliver iron ore and coal.
  
  The Baltic Dry Index and Baltic Dirty Tanker Index which measure cost of shipping dry commodities and crude have dipped 40 per cent apiece over their respective highs in May and July this year.
  
  The impact of this is visible on the stock prices of shipping companies which have tanked between 19-42 per cent since May versus a 15 per cent decline in the Sensex.
  
  Though things have looked better since July except for Bharati Shipyard and Shipping Corporation which have given negative returns, most companies have however returned far less than Sensex’s 12.5 per cent.
  
  While the drop in American consumption of petroleum products has caused a blip in the demand for oil and thus hiring rates for tankers, the slowdown in construction activity in China and factory closures before the start of Olympics reduced the demand for commodities and bulk vessels.
  
  Though the situation does not look too appetising, what are the implications of the current trends on the fortunes of shipping companies and ship builders?
  
  We look at the various segments including tankers, dry bulk, containers and specialised ships to ascertain the short- to -medium term movement of freight rates, supply of ships and growth prospects for Indian shipping companies and ship builders..... do read rest of article here

Despite the rather optimistic articles, shipping stocks dived yesterday.

• A NUMBER of Asian shipping companies saw their stock prices dive today after the Baltic Dry Index fell to its lowest level for almost seven months, amid wider fears that demand for commodities could slow.
  
  The crash in stock prices was led by Hong Kong-listed companies after the fall in the BDI, which dropped 225 points to 6,466, spooked investors... ( source here - subscription required!)

How?

Dr. Marc Faber's commentary on Barron's 2008 Roundtable

Dr. Marc Faber was featured again in Barron's 2008 Round table discussion on the stock market. ( See What Now? )

Of course the most interesting bit from that article was the part on the shipping industry.

• My next recommendation is a shipping short. I turned bearish about home-building stocks in 2005, and felt the troubles in the housing market would hurt the subprime-lending industry and spread to other sectors of the economy -- in particular, consumption. Private consumption now accounts for more than 70% of U.S. GDP, which is why I'm negative about the U.S. economy. The problems here will also affect other economies. The Chinese stock market is closely correlated with the Baltic Dry Index, a shipping index. Tanker rates have plunged, but the Baltic Dry Index is still in the sky. If you can't short the index, short DryShips [DRYS]. The BDI has fallen 28% since Jan. 7. Faber suggests remaining short DryShips.

BDI is still in the sky!

Is there any justification in what's been said by Dr. Faber?

If I would refer back to the posting, Update on the Baltic Index, the BDI chart posted on that posting says it all.

Look at the pre 2003 numbers and one would note that over that DECADE, the BDI was below 2000. Now if I would refer to Bloomberg ( see here ), I would note that the BDI fell another 1.35% or 77.0 to 5615. And 5615 is very much higher than the 2000 level. ( I actually would ass-u-me that perhaps 3000 would probably be a fair level for the BDI). So what do you reckon? Is there justification for Dr. Faber to call a short in this shipping industry?

Here are some other commentary worth noting:

• Faber: We aren't dealing purely with market forces today, but with an economy that is largely manipulated by central banks, which create excess liquidity by cutting interest rates dramatically and letting credit growth accelerate dramatically. I'd like to read a quote from a German newspaper published in 1923, when Germany was dealing with hyperinflation: 'There have been extraordinary rises in the quotations for all shares, the chief cause being the catastrophic change in the economic situation.' In other words, you could have a slump in the economy, yet share markets could go up simply because of excessive liquidity and interest rates being cut, theoretically, to zero.
  
  Since 2002, all asset prices have risen substantially. Against this backdrop, I'll focus on pair trades -- assets that will perform better in the next three to six months relative to others. The U.S. is in a bear market, and earnings will disappoint here and worldwide. Cost pressures will diminish profit margins. The stock market doesn't have a bubble valuation, though the Standard & Poor's 500 is selling at a higher price-earnings multiple than is evident. Take out the energy sector and the S&P has a P/E of 20, not 15. If earnings decline -- partly because the energy sector won't have higher earnings this year than last, and also because the financial sector has diminishing earnings and the economy is in a recession -- then the S&P isn't cheap.



• I didn't say Europe is cheap. Stocks in the U.S. probably are cheaper than 10-year Treasuries. Cash has been a disastrous investment for the past 40 years because the purchasing power of money has diminished. I don't find any great values in the stock market now. If people want to buy stocks, stick to the recommendations I made last year. [You'll find them listed free of charge on Barron's Online, http://www.barrons.com/, under the 2007 Roundtable Report Card.]
  I still like gold, cotton and sugar. My new recommendation is to short the British pound against the yen. The pound, as Felix explained, is overvalued. It doesn't have a lot of upside potential compared to the dollar. It is probably less risky to short it against the yen than the dollar. [The pound has fallen 3.3% against the yen since Jan. 7. Faber remains short the pound.]
  You can also short the euro against the yen. The euro is a relatively expensive currency and European economies aren't going to perform well. Europe also had a lot of excesses, and the ECB [European Central Bank] will cut rates dramatically. Central-bank monetary policies are leading to the competitive devaluation of currencies.

In regards to the USD.

• Faber: It has reached extremes. It also has depreciated considerably against the euro. Today, I would buy the dollar.
  At the moment, there is a war: The private sector is cutting credit and the central banks are cutting interest rates because they are desperate to revitalize credit growth. In the long run, the central banks will win, but in the next six to 12 months, relative credit contraction isn't going to be good for any asset class. In a year's time, the S&P 500 will be lower than it is today.

Not liking the Japanese markets at all

• Faber: Two trades today are totally out of favor. One is betting on the dollar, and the other is buying Japanese shares. I go to seminars, and whereas 10, 15 years ago there were hundreds of people attending the Japanese sessions, today there are hundreds attending sessions on investing in Vietnam. Nobody goes to the Japanese sessions anymore. It's remarkable that people talk about equity valuations being low in the U.S. compared with bond yields, while valuations in Japan are very low compared to the Japanese bond yield. Buy the Japanese stock market on a correction of 10% or so.

Lastly..

• Faber: Many countries have opened up following the breakdowns of communism and socialism. China began opening in 1978, proceeding at different times and in different sectors. The same has occurred since the late '90s in India, and more recently, Vietnam. One country in Asia hasn't begun to attract a lot of attention, but has great potential. It is Cambodia. You can't play Cambodia now, but some Cambodia funds will be launched this year.
  Eastern Europe has climbed the value scale. There isn't a big difference anymore between, say, Slovenia and Austria. Go further east, into Ukraine, and you'll find big opportunities in real estate, in particular agricultural land.
  Basically, investors should avoid correlated assets such as the S&P 500 and the FTSE index, emerging markets, art prices and real estate in financial centers. I'm ultra-bearish about the financial sector, as it will contract for many years, not just one year. I wouldn't buy Citigroup [C] here, or Merrill Lynch [MER]. And as much as I like Abby, I wouldn't buy Goldman Sachs [GS]. I anticipate the day when half of Wall Street will be looking for jobs as drivers of tractors and combine machines.
  

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 Baltic Dirty Tanker Index (BDTI) 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...

http://files.irwebpage.com/reports/shipping/V7ZeHnn7IC/SM-06-07-2010.pdf

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