The Baltic Dry Index Continues To Surge But Is it Sustainable?

In case you missed the recent postings on Baltic Dry Index (BDI), the BDI continued its surged again.

And here is the six months chart on the index.



However not all optimistic at all because the doubt on the sustainability of the rally in the index.

On India's Business Standard, here's one article. Surge in freight rates fails to lift shipping cos' morale

• Surge in freight rates fails to lift shipping cos' morale
  
  Abhineet Kumar / Mumbai November 12, 2009, 0:50 IST
  
  A rise of about 70 per cent over 45 days in the Baltic Dry Index (BDI), the global benchmark for shipping freight rates of dry bulk carriers, has failed to cheer Indian companies, who see it as only a temporary surge.
  
  On Tuesday, BDI was 3,615, up 67 per cent from 2,163 on September 24. The index reached its 22-year-low of 663 in December 2008, sliding nearly 95 per cent in about seven months from an all-time high of 11,793 in May 2008. The rates had collapsed as steel producers cut output. Even the world’s largest steel maker, ArcelorMittal, breached contracts for shipping cargoes in that period.
  
  “There are no positive indications for sustaining the freight rates at these levels,” said K S Nair, director for the bulk carrier and tanker segment at Shipping Corporation of India. “It is a temporary upsurge, as demand picked up from China to fulfill their consumed inventory of iron ore.”
  
  Steel prices have been dropping internationally on low consumption. Earlier this month, Indian producers brought down the price for flat steel by Rs 1,500 a tonne, to Rs 32,000-34,000 a tonne in the spot market. According to analysts, these prices are expected to correct further by Rs 500 a tonne next month.
  
  “Unless consumption in the US and Europe starts picking up and countries like China begin exporting, there would not be a real surge in demand for these ships,” said Nair, whose company has the highest 19 dry bulk carriers in the country.
  
  “We are not sure if the index can sustain at these levels,” said A R Ramakrishnan, chief executive officer, Essar Shipping, which has got nine bulk carriers, including cape size or bulk carriers. “There are positive sentiments building in different geographies, but it is yet to be seen if it brings any fundamental boost to the global economy.”
  
  After the hitting the 22-year-low in December 2008, the index had already recovered to 4,291 this June, as China started building inventory for iron ore. According to industry analysts, depending on the ships, companies achieve operational break-even at index levels of 3,700 to 4,000. But it again fell to 2,163 on August 24.
  
  New vessels coming from the yards are another concern for the industry, for the low freight rate expectation. “We are expecting 10-15 per capacity addition in the global fleet in the next one year and this is further going to put pressure on the freight rates,” said Vikram Suryavanshi, a shipping analyst with Karvy Stock Broking, a local brokerage

Here is another article.

• Baltic index rises further, Chinese demand strong
  Wed Nov 11, 2009 9:17pm
  By Jonathan Saul
  
  LONDON, Nov 11 (Reuters) - The Baltic Exchange's main sea freight index .BADI, which tracks rates to ship dry commodities, stayed at over a four-month high on Wednesday as firm Chinese demand for raw materials boosted sentiment.
  
  The index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertiliser, rose 3.68 percent or 133 points to 3,748 points and was at its highest since June 30 in a tenth straight session of gains. In recent months Chinese demand for iron ore -- the primary material in the manufacture of steel -- has dominated freight market activity while adding to swings on the main index.
  
  "Pacific capesize freight rates are continuing to firm on the back of iron ore demand into China, with strong support in the last 10 days lifting Pacific spot rates for Australia-China," John Banaszkiewicz, managing director of freight derivatives broker FIS, said.
  
  "On the back of that, interest in fixing for short periods has grown, suggesting (ship) owners have confidence in the nearby market."
  
  Iron ore appetite has picked up in Europe, with seasonal demand for coal, especially in France and Germany, helping to bolster interest for the larger capesize ships and also smaller panamax vessels, brokers and analysts said.
  There has also been a rise in interest for iron ore and coal in North America and Japan, they said. The Baltic's capesize index .BACI rose 4.56 percent on Wednesday and was at its highest level since July 3. Average capesize earnings were at $67,385 on Wednesday, over 27 percent down from their June peak this year.
  
  PANAMAX PUSH
  
  Port congestion in Brazil as well as in China and at Australia's Dalrymple Bay have tied up many capesize vessels, which typically haul 150,000 tonne cargoes such as iron ore and coal, brokers and analysts said.
  
  The Baltic's panamax index .BPNI rose 2.8 percent on Wednesday, helped by activity in the U.S. Gulf driven by soybean exports bound for China.
  
  Panamax rates in the Pacific have also been boosted by appetite for coal cargoes out of Australia and Indonesia into south China and Japan.
  
  Brokers and analysts said Chinese demand still remained the key element in sustaining freight gains.
  
  "Should the Chinese decide their stockpiles are full then the market rally could come to an abrupt end," Banaszkiewicz said.
  
  China's production of metals, fuel and power stayed at record levels last month as industrial output hit a 19-month high, but falling imports of copper and iron ore fuelled doubts whether it really needed so much material. [ID:nPEK338701]
  
  The main sea freight index hit a more than eight-month high on June 3 of 4,291 but has been erratic since then.
  
  "Solid demand from China and other importing regions have sustained a tight market balance, which we expect will remain tight through Q4/09 boosting the (dry bulk fleet) utilization level to 93-94 percent," Arctic Securities said in a report.
  
  "From 2010 and beyond we are more negative and expect fleet utilization dropping to 85 percent by 2011. Deliveries will weigh rates down -- even with a continued steady recovery in global demand for seaborne trade."
  
  Analysts say freight rates could come under pressure due to concerns over the rising number of new ships set to hit the market in 2010, despite indications of some vessel cancellations and delays, analysts said.
  
  "Longer term, the outlook is still clouded by the potential impact of new building (ship) deliveries to the supply side," FIS's Banaszkiewicz said. (Editing by Anthony Barker)

Quote to remember: "Should the Chinese decide their stockpiles are full then the market rally could come to an abrupt end,"