Overhyped Baltic Dry
January 30, 2008 by E. Cartman
Supposedly, the Baltic Dry shipping index is a very reliable forward-looking commodities indicator. Basically, if shipping falls, commodities will almost certainly fall in the not-too-distant future. Shipping is a lot like refining: when demand is above capacity, prices soar, and when demand is below capacity, prices plunge. So volatility is the order of the day, and a “Black Monday” does not mean a 3% drop; it means a lot more than that.
Commodities hounds have noticed that the Baltic Dry Index has tanked 40 percent since November. Bearish for commodities, right? You would think so … except ….
A recent theory doing the rounds of the shipping and commodities world lays blame for the slide in dry bulk shipping rates - and consequently the BDI - on a single Taiwanese shipping magnate: Nobu Su, whose privately held Taiwan Maritime Transport is the largest participant in shipping futures markets, according to the FT’s transport correspondent Robert Wright.
Wright reported last week that Su denied playing a pivotal role in the past few weeks’ decline of dry bulk shipping rates, saying it resulted from fundamental market changes.
But participants in dry bulk markets have attributed the decline in rates from last year’s record highs partly to TMT’s heavy betting on a fall in futures markets. There have also been claims from competitors that Mr Su, chief executive, has helped to push rates towards his position by chartering out some of his 130 ships at below market rates.
TMT excites strong passions because of its reputation for making large — and often successful — bets on rate movements in the futures market. It is also unique among large futures market players in owning a substantial fleet of ships.
Not surprisingly, Su through his spokesman told Wright he could not have moved the market on his own. “It’s no longer the case that one man could single-handedly influence the direction of the market,” he said.
On the claim that TMT was chartering ships at below market rates to bolster its futures position, Su said he simply aimed to get the best price. Sometimes it’s below the market average, sometimes above,” he said. “It just depends on the price we’re offered.”
In a separate post for FT Alphaville last week which contains a beautifully clear explanation of BDI mechanics and the fallout from the SocGen trading scandal, Wright examined the conspiracy theories about falling commodities prices because, he said:
Before Thursday’s SocGen revelations, analysts had found a new favourite indicator to justify falls in equity prices. It could be, of course, that the many analysts who have talked up in the last fortnight the significance of the plunge in the Baltic Dry Index — it’s down 40 per cent from its record peak in November — are long-term, serious students of freight rates.
A bullish factor for commodities in the medium term.
Furthermore, proprietary research indicates that the rising price of oil will be easily offset within the dry bulk industry by increased coal shipments. The business is still exploding. Credit is still soaring. All levers are reflating. The monolines situation will resolve itself much more efficiently, as Berkshire takes over the business.
I would offer a “yes, but” as a rejoinder. Since shipowners REACT to things, I would say that any freight index is a good lagging indicator, but it’s got its own little rhythms.
The composite of 4 Capesize routes within the Baltic Capesize Index ( a component within the BDI ), is good to look at. Swaps are traded on it. The spot level has now climbed from $80K / day up to $104 K / day since the darkest days of the BDI pullback.
Freight traders got sucked in to a positional freight maelstrom- this caused the composite to slide down in Nov and Dec 2007. Iron ore negotiations, working down ship queues and piles of ore, and just simply “let’s charter our ships before the hols”- all or this contributed to that swirl or whoosh that we saw.
And, you know what, during 2H 2007’s irrational exuberance in the drybulk freight markets (BDI captures this), the forward rates were sharply backwardated during the whole time that the spot was climbing. So, it was not a question if the spot rates (BDI as a poor man’s proxy) would fall, just a question of when?
But forward expectations were at a contango with respect to 2008 at the depths of the slump. Even shipping jocks thought that the market would go up.
So, spot has recovered, as described above. And, so has the forward curve- swaps on the 4 route composite have also moved up- they are trading up near $120 K for 2Q 2008, a little lower from the torpid 3Q.
Does this sound like the end of bullish commodity markets as we know them? (that was a rhetorical question, I am obviously a believer that the shipping market has some legs for 2008). For 2009 - 2010, the huge increase in vessel supply kicks in. That’s why the forward rates are backwardated beyond 2008.
Shipping supply / demand interaction. A huge number of vessels were ordered in 2H 2007. The pundits have expressed concern as to whether the supply will be delivered, but we’ll save that one for another posting.
Investors need to look beyond the BDI, a dangerous single point indicator of ??? at best, and see what the sentiment is of the freight traders. And, they have not written off the markets yet. Mr Nobu Su’s TMT has a large majority position in a Nasdaq listed (recently, after emergence from SPAC chrysilas sp?) company, so I would think part of him wants the market to go up.
As one pundit ( the former top man at London’s Baltic Exchange) succinctly put it, “this time in the market cycle, the people ordering the Capesize bulk carriers were not the same people ordering the blast furnaces.”
bdp1,
Great comment — thanks for the contribution.