Posts Tagged ‘Baltic Dry Index’

Norton Rose Shipping Industry Survey Paints Bleak Picture

September 14th, 2009 Michael McDonough Comments off

Lloyds List, a leading maritime and transport news terminal, reported the results of the first major shipping industry sentiment survey since the beginning of the economic downturn that was conducted by Norton Rose.  The survey “has painted a bleak picture of the sector with the vast majority of companies predicting that economic conditions will get worse before they get better. “  The results showed that 81% of those surveyed expects that it will be at least one year before the number of banks lending to the sector increases.  Additionally, 79% do not anticipate that lending will return to its pre-crisis levels within three years.  Possibly more concerning was this, “Of the shipping companies polled, 63% expected to see major bank enforcement of problem shipping loans, while 43% thought that this process would peak within the next six to nine months.”  It is important to note that this survey was not specific to the dry bulk sector.  The piece concluded with this comment from Harry Theochari, Norton Rose head of transport, “Notwithstanding the large number of cancellations of new orders, there is still a huge number of newbuildings, in all sectors, to be delivered between now and the end of the year. Unless there is a marked pick up in the world economy it is my view that ship market values and shipping stock prices will continue to decline until at least the end of the year.”  The shipping industry survey helps support my view that the industry is in the midst of a protracted downturn with limited upside potential over the short-term.  The DBSI is presently trading -2.6% below the level when it was introduced on May 22nd 2009.

Source: Bloomberg, Capital Link, & My Calculations

Source: Bloomberg, Capital Link, & My Calculations


Lehman’s Impact on the BDI & Shipping (Then & Now)

September 14th, 2009 Michael McDonough Comments off

In retrospect, the widespread panic that engulfed the world’s financial markets after the fall of Lehman Brothers may have been somewhat overblown considering the actual long-term impact of the event, which was significantly mitigated through innovative monetary policy.  But at the time, this did not prevent an almost immediate shut-down of credit markets around the world affecting most, if not all, facets of the global economy.    The shipping sector was no exception.  Within shipping there is an essential financial instrument called a ‘Letter of Credit’ (LOC).   LOCs facilitate the bulk of global trade by guaranteeing the buyer’s funds will be delivered to the seller upon delivery of the goods.  These instruments are issued mostly by financial institutions.

As I mentioned, Lehman’s demise led to an immediate lockup in global credit markets, including LOCs.  To help quantify this I created the chart below, which plots the TED spread against the BDI from 2006. For this application I slightly modified the traditional TED spread and used 3M LIBOR Basis Swap against the Fed Funds rate; this measure acts as a yard stick on implied counterparty risk as LIBOR is the rate at which banks are willing to lend to each other.  You will notice that the unprecedented jump in the TED spread coincides with an extraordinary drop in the BDI from a peak of nearly 12,000 to a low of 663 in only a matter of months.  To help put this into perspective, an article by “The Independent” noted that in June 2008 a shipment of coal from Brazil to China would have totaled US$15mn per voyage compared to US$1.5mn by October, and rates moved even lower from there.

Source: Bloomberg & Capital Link

Source: Bloomberg & Capital Link

Without LOCs, the shipping sector came to what was essentially a standstill. Even where demand still existed, buyers were unable to get the credit to guarantee payments.  A quote from an article in the Financial Post published in October of last year put it best, “There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”

How times have changed.  In the year since Lehman’s collapse, credit conditions have improved considerably, as demonstrated by the TED spread, which has begun reverting back toward its historical average.  Better credit conditions have provided increased liquidity allowing buyers around the globe easier access to LOCs.  This alone however does not mean smooth sailing for the shipping sector, but what it does mean is that the sector is highly unlikely to re-test the lows experienced during the end of 2008 and early 2009.


Consumer Confidence Disappoints, Shipping Stocks Suffer

June 30th, 2009 Michael McDonough 1 comment
As I highlighted in my column on on Monday shipping stocks will be highly susceptible to any major economic news impacting market’s views on the long-term outlook. This mornings consumer confidence number was proof of that, tumbling to 49.3 compared to 54.8 last month. Both the present situation index and the future situation index declined. Most of the recent gains stemmed from increases in the future situation component, which fell this month to 65.5 from 71.5. The present situation index slid to 24.8 from 29.7. The drop was likely fostered by concerns over business conditions and the employment situation.
The recently high betas in the shipping sector over macro data are rooted in the hope that once Chinese demand begins to diminish for dry bulk goods, increases in ex-China demand will offset, or even more than offset, the decline in Chinese imports. But, in order for this to occur it needs to be clear that global economies, especially the US, are on the road to recovery. Any data supporting or opposing this view will significantly impact trading in the shipping sector Nevertheless, today’s data may give Thursday’s crucial payroll number even more ammunition in the event of an upward or downward surprise.

In other news the Case Schiller Home Price Index came in slightly above analyst’s expectations showing a decline of only 18.1%.

Shipping and Mining Stocks

Source: Google (12:42PM)

Brazilian Iron Ore Exports Drop in May

June 5th, 2009 Michael McDonough Comments off
A recent release by Brazilian officials showed that iron ore exports fell to 15.3mn tones in May, a drop of 35% from last month and a 2009 low. This is likely due to diminishing demand by the country’s largest custom, China. A note released by Goldman Sachs confirms this theory stating, “Heavy rains in the north of Brazil and port congestion in China could have had a negative impact on Brazilian iron ore exports, but the main reason … is likely lower iron ore demand from China due to high steel and iron ore inventories.”

Over the past several weeks, the shipping industry has been experiencing a strong resurgence in activity primarily due to Chinese iron ore imports. However by the end of this week those gains began to reverse, as indicated by a drop in the Baltic Dry Index (BDI). I anticipate the BDI will continue to moderate as Chinese demand continues to diminish, and an over supply of new capacity hits the shipping sector. This will likely add risk not currently priced into equities trading within the space. Companies that have high leverage ratios due to over expansion will be most suscetpible to any downward pressure to shipping prices, while companies with limited expansion plans and low leverage will be better position to weather the coming storm.

For a more detailed analysis please see my column on international trade at


BDI to face downward pressure

May 29th, 2009 Michael McDonough Comments off

As I have discussed in great detail in my articles; I believe the recent rally in the Baltic Dry Index (BDI) cannot be sustained, and we are likely to see a pullback in the index; along with dry bulk shipping and mining sector stocks. The BDI’s rally has been driven almost exclusively through China’s record demand for raw material stemming from the government’s USD586bn stimulus package. Currently, despite record raw material imports China’s industrial production has actually begun to wane and export growth has turned negative. To put it simply, there’s a lot more going in than coming out; this cannot be sustained.

Without a significant, yet unlikely, increase in global demand for Chinese goods, current imports will only add to record breaking inventory levels. China is currently at or near its maximum inventory levels; meaning it is very likely we will soon begin to see a drop in China’s extraordinary import levels. This diminishing demand will translate into a correction for the BDI and those sectors with high correlations to the index (i.e. miners, shippers, etc…)

The retraction in the BDI will be exacerbated by a record increment in fleet expansions scheduled to be completed over the next 1.5 years. In fact according to my calculations and data from Barry Rogliano Salles, a Paris based shipbroker, the size of the global capesize fleet, which is the largest class of bulk carrier, is expected to rise by 50%. Many analysts believed this magnitude of expansion was irrational even at the peak of shipping in 2008.

Currently, 10% of the estimated 855 global capesize fleet is idle off the shores of China waiting to unload at congested ports, with an average 9 day wait. The growing supply of new vessels combined with the freeing of idle ships off the coast of China will create a supply glut in the sector dragging down shipping prices. Hence my bearish short-term view on the mining sector (BHP, RTP, VALE), and my generally bearish view on the shipping industry, especially for highly leveraged shippers such as Eagle Bulk Shipping (EGLE); companies with lower leverage such as Diana Shipping (DSX) should be better positioned to weather the coming storm.

Again for more details please check out my articles on


The Baltic Dry Index Revisited

November 8th, 2008 Michael McDonough 1 comment
I have been receiving a significant amount of email regarding an old entry I wrote back in March 2008 regarding the Baltic Dry Index (BDI). Back in March the BDI was recovering for an interim low it experienced in January on fears of a global economic slowdown, however, since then the situation has become far worse. The BDI is now trading at levels not seen since 2001. To help put this into perspective a recent article by “The Independent” noted that in the beginning of June the total cost of a shipment of coal from Brazil to China would have totaled USD15mn per voyage compared to USD1.5mn currently. At the same time, the article noted that the daily cost of chartering a capsize bulk carrier during this cycle’s peak amounted to USD234.0K vs. USD5.6K presently. This is a drop of around 98%!
The Baltic Dry Index’s recent plunge
Source: Bloomberg

Now on to what is important… Why has this happened? Unlike the drop the index experienced earlier this year, based primarily over concerns of a global economic slowdown; the current plunge also takes into account the ongoing liquidity crisis and commodity deflation. The shipping industry relies heavily on an instrument called “Letters of Credit” (LC), which is a guarantee issued by a bank that the buyers funds will be transferred to the seller at the completion of the transaction (i.e. traded goods properly received). As liquidity tightened around the world so has the issuance of these instruments, further slowing global trade. According to Trade Finance Magazine to cope with this, the market has begun to see a resurgence in export credit (i.e. the seller issues loan to the buyer via an export credit agency), but as the magazine pointed out this is a “relatively slim corridor”, and holds significantly more risk for the exporter compared to a traditional LC.

As if this alone were not bad enough it would appear that deflation in commodity prices has caused many companies to begin using up raw material inventories rather than importing new stocks. This is basic economics, why buy something today that will be cheaper tomorrow? Nonetheless, these industries will eventually run low enough on inventories where they will be forced to purchase more, which should put some upward pressure on shipping costs.

The CRY Commodity Index has also dropped significantly
Source: Bloomberg

If prolonged this ’suspension’ in global trade will have significant adverse effects for export oriented economies, and increase the likelihood of further reductions to 2009 growth rates . Nonetheless, I do believe that as companies run low on inventory and as global credit markets continue to unlock we will see a stabilization and marginal recovery in shipping costs. However, it is unlikely we will see BDI levels anywhere close to those at the beginning of this year anytime before the end of this decade. In the short-term yet another piece of negative news for the global economy…

As an aside I created a monthly market cap weighted shipping index starting in May 2005 to compare against the BDI. I used the following companies for the index 1) AP Moller – Maersk 2) Mitsui OSK Lines 3) China Shipping Development Co 4) Nippon Yusen 5) Kawasaki Kisen Kaisha 6) Evergreen Marine Corp 7) Orient Overseas International 8) Neptune Orient Lines 9) Hanjin Shipping Co. & 10) CSC Nanjing Tanker Corp. Maersk alone makes up roughly 50% of the total market vap of the index.

Global shipping companies could continue to face downward pressure until the BDI begins to moderate.
Source: Bloomberg


The Baltic Dry Index (BDI): Can it tell us anything?

March 4th, 2008 Michael McDonough Comments off

BDI Revisited in new entry written 11/08/2008

Globalization and world trade has become the major growth force in emerging market economies and has significantly influenced developed nations as well. The big question is; how or has the US led slowdown affected this trend. There are of course a series of indicators we can look at to determine the size and value of international trade. But for this analysis we are going to take a look at a less discussed indicator, the Baltic Dry Index.

The BDI is showing a bit of a recovery

What is the Baltic Dry Index (BDI)?
To put it simply, the BDI is a daily index which tracks the shipping costs by sea for various materials including metals, grains, oil, etc…

Why we think it is important?
You can’t just build a new cargo ship… When demand for shipping goes up and the supply of boats remains constant prices will go up. Hence we can use the BDI index as a gauge for the demand of shipping and a proxy for the level of international trade. In fact looking back on the data we can see a high correlation between global trade and the BDI. Keep in mind other factors such as oil prices can affect the BDI, but at the same time shipping companies can mitigate these effects by hedging and reducing speeds to conserve fuel.

Most importantly the BDI is a daily index, so we can track demand in the shipping industry in real-time. So if the slowdown is affecting global trade we will see it now not later, and a change in demand for exports could have huge impacts on a lot of economies.

What is the BDI telling us now?
The BDI reached unprecedented levels in 2007, corresponding with the rise in international trade. However, we have recently seen a decline starting in December of 2007, corresponding to the slowdown in the US. The positive news is that it appears the BDI bottomed on Jan. 29th 2008 at 5,615, and is staging a bit of a recovery now at 7,993 verses it high of 11,039 in October. Although it is tough to say how much of this is could be oil related.

Interesting to note is that Canada experienced an 8.5% drop in exports in 4Q07; Canada is the US’s largest trading partner. Australia also saw a weakening of exports during the same period.

We do believe global trade is being affected by the US led slowdown, and that this indicated by the BDI index. The good news is since the BDI is that since it is a daily index we can get a real time idea of what the slowdown could mean to global trade. The bottom line is we think that in this day and age the BDI is an index which should get more attention despite its imperfections.

There is a significant correlation between the qoq change in US (imports +exports) and the BDI…


We wanted to look at the relationship between the BDI and an ETF of natural resources companies, since this industry would make significant use of international freight shipments. However, we could not find a suitable ETF, so we used the equity price of BHP Billiton. The results were not surprising. As expected there was a significant relationship between the stock price and the index. To us this suggests the BDI is heavily influenced by raw commodities exports (which makes sense), and provides an excellent gauge for the global demand of raw commodities.

The BDI has a significant positive relationship with the EQ price of BHP.