Friday, June 25, 2010

Baltic Dry Index Reflects More Immediate Shipping Needs These Days

New Factors Influence One of the Freight Markets More Reliable Indicators
Shipping News Feature

UK – WORLDWIDE – The slump in the Baltic Dry Index, down to 2502 yesterday, continues from its most recent high almost exactly a month ago when it was stretching toward 4300. Yesterday's figure represents the lowest point of the index since the tail end of October when it started to climb up after bottoming out at 2175. The indicator of dry bulk goods such as ores, grain and coal however can be a fickle beast; beware anyone who claims to know all her moods, all any analyst can do is take in as many factors as possible and hazard a conclusion. Observers would do well to remember recent history, on the 19th May 2008 the Index hit 11709, by the 5th December that year it had dived to an astonishing low of 663, falling faster than a banker from a window. The reasons for the crash at that time have been discussed ad infinitum but the situation now is completely different, and altogether more complex.

One of the main reasons for the current depression is simply the lack of demand for iron ore from China in the past few weeks. In November we told of increases in orders for these commodities, now, we are told bookings are down, hence the drop in demand and its consequent effect of the rates for bulk carriers. Despite this very major factor we would do well not to ignore how the index is compiled and look at the statistics a little more closely.

The BDI factors in several vessel classes, from Handysize up to the enormous Capesize for vessels exceeding 100,000 DWT and these last make up only around 10% of the world’s dry bulk fleets. They are however, capable of shipping over 60% of dry bulk cargoes simultaneously and their primary trade is carrying just the goods which the Chinese have now slowed orders for. This leads to some anomalies hard to comprehend for anyone outside the world of bulk freight. The rate for the larger Capesize ships is currently around 13% less than that of their smaller cousins the Panamax class which generally move agricultural as opposed to mineral goods.

The Yuan is another major factor in the equation to be considered, not so much for what it is doing but what many people consider is an uncertain future. And just this week another unusual factor has entered and increased the confusion, this time one which may even help the index rebound. The spectre of a mining tax has been causing consternation in Australia. The so called ‘Henry Tax’ after a 2008 government review was due to impose a 40% levy on all the major mining groups who have spent millions to rebuff the attempt to limit their profits. Now with premier Kevin Rudd standing down after his fall from popularity rivalling the speed of the BDI drop, it seems as if Welsh born Julia Gillard, his successor as PM may relent or revise the tax, despite many Australians feeling it is justified.

So the message is, watch the BDI, but remember that its past importance may have diminished somewhat as a fortune teller, the commodities it is based on were originally selected as they were large volume staples and considered almost impervious to speculation due to the size of their markets. These days, with less merchandise retained in almost every industry, trends move more quickly and markets can be more volatile. Some bulk carriers have moved into the container market but more have transferred in the other direction on the principle that dry bulk and liquid cargoes will always be required; the next few weeks could be interesting for index watchers.