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Finding a Complement to the BDI May Lie in the Rails…

September 24th, 2009 Michael McDonough

Carrying over from a theme I mentioned earlier this week in my column on thestreet.com, I began contemplating what frequent transportation index, if any,  would be a good complement the BDI as a forward looking indicator toward the global economy. My goal was to find something that could perhaps help factor out the impact of some of supply glut in dry bulk shipping sector.  What I mean is I wanted to find something that if moving up in conjunction with the BDI would almost certainly be good news for the global economy.  Concurrently, if the BDI was to remain static while the complementary index rallied, we might get some insight into the over supply of ship’s impact on the BDI.    After a few moments of thought I believe I found that index.

The major rail companies in North America release a weekly metric on railroad performance, which among other things measures the total number of rail cars on line.  I briefly mentioned this index in a piece I published several weeks ago, showing the strong correlation between CSX’s cars online and the BDI (see chart).

CSX vs. BDISource: Bloomberg, Capital Link, CSX

However, to get a true gauge of potential economic performance we would need to include more than just CSX, hence I created an aggregate index with car on line data from the following companies:  BNSF Railway Company, Canadian Pacific, CSX Transportation, Kansas City Southern, Norfolk Southern, and Union Pacific Railroad.  Once you factor in these additional companies the relationship becomes far less apparent (see chart).

Rail Volumes vs. BDISource: Bloomberg, Capital Link, Railroad Companies

The reason behind this will be fodder for another article, but it is possible that CSX has a higher exposure to the commodities, which were in high demand from China.  Nevertheless, what has been a horrible year in terms of aggregate rail volumes looks to be bottoming.  I recently heard from executives running most of the companies within this aggregate index, and in general their outlooks confirmed a possible bottom, but by no means a rapid recovery.  They were are also optimistic regarding the effects a potential record US harvest could have on rail volumes, a view echoed by participants in the panamax sector.  Finally, this is more or less in-line with my view that the US and developed nations will return to growth, albeit at a measured pace, with developing nations outpacing the developed world.  Now, lets see if the BDI and rail car volumes will agree…

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