There seems to be some misconceptions about tonnage capacity in here. New canals and passages tend to depress rates, not support them, regardless of the amount of trade. Take the proposed Kra canal for example (which in all likelihood will not get built). The current transit time from the Arab Gulf to Japan is roughly 20 days. 2 days loading, 2 days discharging makes is 24 days turnaround. That's 15.25 transits per year at 13 knots (speed can increase/decrease tonnage capacity too). If the Kra canal shaves 3 days off the total transit time, that's 17.40 voyages per year - an increase in available tonnage supply. An increase in VLCC supply would further depress rates. The same holds true for dry bulk carriers. China is pushing the One Belt, One Road initiative, Russia has opened the North Sea passage lowering the transit time from NE Asia to Europe, and both Suez and Panama have been or are in the process of expansion. All of these are likely to further depress rates as they increase freight efficiency.
Which will stimulate world trade ... which in turn will support rates. No misconceptions on my side. History.
Q Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). ... ... Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.[9] ... ... Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. "People don't book freighters unless they have cargo to move." https://en.wikipedia.org/wiki/Baltic_Dry_Index On 4 February 2016 the Baltic Dry Index reached the historic low of 298. UQ
Unless that is for someone else's benefit, I worked in the industry for close to 10 years, so I am very familiar with BDI and what it means.
"Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand)." If they build too many ships and the # of ships in use remain the same wouldn't that skew the index down even though the economies/consumption may be stable? Just asking.
Yes, there is an oversupply of ships. Cargo movement has not come to a halt. We now have a slow growth world at the moment.
Ships get "parked" depending on the particular owner's tipping point of the cost to operate. For some there is no real savings so they keep them moving as rates go lower and lower in a self-perpetuating cycle - till it finally reverses. Right about the time ships scraping of ships is the highest.
Q Another Record Low for Baltic Dry Index By Carleton English | Feb 04, 2016 http://realmoney.thestreet.com/articles/02/04/2016/another-record-low-baltic-dry-index Another day, another recording-breaking low. On Thursday, the Baltic Dry Index hit 298, representing a new low for the index in its 30-year history in its current form. The dry bulk shipping industry has borne -- and will likely continue to bear -- the brunt of the decline. "The dry bulk market was difficult in Q4, but compared to what's happened the past two weeks, Q4 could be considered, the 'good ol' days,'" Noah Parquette of JPMorgan Securities wrote in a note released at the end of January. Among the reasons Parquette cited for pain in the industry was the 30% year-over-year decline in Chinese coal imports as well as sluggish demand for steel and iron ore. The Baltic Dry Index tracks the cost of shipping raw materials, such as metals, grains and fossil fuels across various trade routes. As the materials transported are pre-production materials, lower prices are considered to be a leading economic indicator for declining global demand. However, while the Baltic Dry Index is often cited as a demand indicator, supply issues may also be dragging the it down and this is why shipping companies are getting especially hurt. Building a vessel can take more than two years and idling one when demand is low is costly. Put simply, adding a vessel to a fleet is not a decision companies take lightly. When global growth was stronger and financing was cheaper, some players seized the opportunity to build new vessels. Unfortunately, they may have stretched themselves thin to add to their fleets. Now that there is a fall in demand, coupled with an increase in supply, the index is well below the lows seen during the financial crisis of 2008-09 when it fell to 663. "Heavily indebted companies have essentially forced sellers to shore up balance sheets, and the deep-value buyers have used that to their advantage to drive down prices," Parquette wrote. It's tough to find bright spots in the industry as many of the stocks trade in the single digits and have seen their market cap severely cut over the last year. On Thursday, Diana Shipping (DSX) announced plans to acquire three Panamex vessels for a total purchase price of $39.8 million. The vessels are expected to be delivered in March and the transaction is contingent upon Diana Shipping obtaining bank financing for the full price. Shares of the company closed up nearly 5% to $2.58 on Thursday but are down 62% over the last year. An analyst team at Credit Suisse called the acquisition "opportunistic" but mentioned that the ships will likely start losing money once they are delivered in March. Both JPMorgan and Credit Suisse hold a Neutral rating on Diana Shipping, but the analysis contains caveats. "Dry bulk asset values have fallen substantially over the past 12 months, and the decline in the market of the company's fleet could negatively impact the company's borrowing capacity and/or result in non-compliance under restrictive covenants," Parquette wrote. UQ
Q The Baltic Dry Index Falls to Lowest Level on Record Ever Mat Spasic February 5, 2016 http://www.dailyreckoning.com.au/th...to-lowest-level-on-record-ever-cw/2016/02/05/ We’ve made a habit this past year of tracking the state of the Baltic Dry Index (BDI) at The Daily Reckoning. We feel it’s one of the least tainted global economic indicators available to us. What it says about the global economy will tell you more than any bull or bear stock market ever will. As it happens, it’s tells a rather traumatic tale about the economy. Without fail, the BDI has managed to go from bad to worse almost every time we look at it. Yet it surprised even us when we saw what just took place. To say that the Baltic Dry Index has hit rock bottom would be an understatement. We certainly hope it’s rock bottom, anyway. But we’re not counting our chickens just yet. So how bad was it? Well, the index fell to 298, which was 50% worse off than the previous record low of 556 set back in 1986. Like any index, the general rule of thumb to remember is that bigger equals better. There was a point, back in 2008, when the index was at over 11,000. Which means that the BDI has decline by 3,600% from seven years ago! To call the figures abdominal would be an understatement. But what does the BDI actually measure? Essentially, the index tracks shipping freight rates. It might track the cost of shipping iron ore from Australia to China for example. Freight rates works much in the same way as the BDI itself. The higher the cost of shipping, the more demand there is, and the better the global economy is for it. Admittedly, tracking this index is a dry subject for many people (the clue is in the title). Maybe that’s why it receives so little attention in the mainstream press. Either way, it’s a very important measuring stick that cuts through the noise and crap that dilute other indices. As I’ve written before, the BDI isn’t influenced by anything other than pure economics. Policymakers can’t manipulate the BDI using their various instruments to polish a turd. So it gives us a good reference point from which to gauge the state of the global economy. That’s not to say stock market speculators have tried to inflate the index before. They have, but with limited success. Last year’s attempt to do just that proved a temporary boost that didn’t last. The truth always wins out when it comes to freight shipping rates. Let’s take a look at why the BDI is tanking as it is. To be fair, its decline, awful as it is, is also somewhat predictable. Blame commodity prices for it. The ongoing commodity rout, which shows no signs of improvement, makes a huge difference to the BDI as well. But is that the only reason? Dana Lyons, of J. Lyons Fund Management, says commodities alone can’t explain the dramatic falls we’re seeing. He notes: ‘However, the depths that the index is now plumbing is quite alarming and suggests trouble in the global trade picture. ‘It would also suggest perhaps that the deflationary pressure is not just a supply issue. Consider every prior drop in the Baltic Dry Index down to the 500–600 level. Each time, the index immediately jumped as if latent demand was just waiting for those lower prices. That development has not yet occurred this time around, even as prices are reaching 45% below the previous record low. ‘The Baltic Dry Index has become a trendy thing to mention in recent years when discussing global market and economic conditions. The truth is, nobody really ever knows for sure what the broader message is behind the index’s behaviour. That said, this recent plunge is making it quite difficult to conceive that it means anything positive in terms of the global economy and deflationary pressures.’ When the index falls to its lowest ever level on record, the broader message is pretty obvious. Shipping rates are plunging because the global economy is too. We don’t need to draw any more conclusions than that. So what can policymakers do in response? What will change to arrest this slide? In other words, what we’re really asking is, how can we fix the global economy? There’s no obvious solution. More than that, the quick fix, credit Band-Aid solution isn’t the answer either. Does anyone out there still think that easy credit is going away anytime soon? No, me neither. You can expect ever lower (negative) interest rates to become more commonplace. Not just in Australia but in the US too. And yes, US rates are going back down as quickly as they went up by a measly 0.25%. That token gesture has already run its course, just one month after it was carried out. As for the European Central Bank, they’ve held rates at, or below, zero for years. And just last week, the Bank of Japan joined the club of global NIRP’ers that have rates in the negative. How long before the Fed does the same? How long before Reserve Bank of Australia follows suit? Don’t put anything past them. On top of lower interest rates, expect more quantitative easing too. More helicopter money for markets to play around with. To distort asset prices. To go towards things that never fulfil the intended purpose of fixing structural problems within economies. Central bankers can try and convince us all they like. But the days of monetary easing have only begun. They’re not at an end, as markets were led to believe. We’re entering a new era of monetary madness. The BDI merely shows us how low we’ve sunk, and how crazy things are about to get. UQ
The economy is clearly on the cooler side, but the dramatic drop in BDI seems far more about the oversupply of ships, built on cheap debt, than about an impending economic disaster (not that I'm discounting the possibility of a worsening economy -- but I am discounting the theory that "the drop in BDI is due to a hidden catastrophe in the economy that has yet to be manifested otherwise", as seems implied by a lot of the financial press articles that have been cross-posted). Thanks for your informed comments, SunTrust. I wonder at what point does the BDI get so low that it simply doesn't make sense to operate ships at all, even disregarding the cost of capital in the ships themselves? Or is that not what the BDI measures (at least in any direct sense)?