Interesting indicator: http://www.zerohedge.com/news/2015-02-09/worlds-best-known-global-shipping-index-has-crashed-its-lowest-level-ever With dry bulk shipping lower than ever in recorded time, is this a signal of a global recession or something else. $40-50 crude + lowest dry bulk ever = looming trouble? Of course, bunker is one of the biggest inputs into shipping costs so this will be a driver of the decline in dry bulk costs… But to the lowest level ever? Oil prices have been much lower before with higher dry bulk costs. Certainly not a bullish indicator for world trade…
I have looked at this for some while…technically (not that it holds much weight without other factors) but as the Dry Index has been going down, the S&P 500 overall has been trending up.
Saw this on Twitter couple weeks ago. Thought it was interesting but assumed you guys had seen it already
Isn’t this just correlated with oil prices? Those cargo ships run on some sort of petroleum product, after all.
My understanding of this index is that looking at it over a 10-year time frame is misleading b/c during the boom period (2006-2007) investment in new ships was highly incentivized, and many of these companies levered up to make the investments in new ships. The major growth in capacity has suppressed shipping rates since, which is why rates are so much lower in recent years compared to the mid 2000’s. The new cargo ships are HUGE, too. Lots of capacity in this market.
That said, looking at this index over the last 18-24 months (where there isn’t much incremental supply) tells you something. Thanks for bringing it up b/c the recent drop off is noteworthy.
It is correlated but not JUST correlated. Crude prices (and bunker specifically) have been much lower before with higher shipping rates. This is indicative of something more than just low input costs for ships.
I’ve been following this religiously. Unequivocally speaking, I don’t see how you distill the demand side of the drop in the BDI from the supply side and draw conclusions about larger macro trends. There are a confluence of factors leading to the sharp decrease in the BDI:
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Slow-down of China’s economy (major player here)
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Over-supply of Dry Bulk Vessels (there is so much oversupply that a number of dry bulkers have recently gone bankrupt)
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Decrease in fuel prices (to a lesser extent)
As a example, if you look at a Dry Bulk leasing company like Global Ship Lease (GSL) and compare them to Paragon Shipping or Scorpio Bulkers, you’ll see that Global Ship is making a profit while Paragon and Scorpio are in the red. GSL Ships on long term contracted shipping routes and does not build vessels until they have a contracted demand for it.
If the zero hedge article can tell me what percent of the decrease is due to decrease in demand and what percent is due to oversupply then I’ll sit up and listen. We can definitely say that there is a slow down in the Chinese economy, which I would argue is already priced into the market. Beyond that I don’t see what macro trends can be distilled.
If you want to research this more, the following resources are good for that:
^ Great post, thanks!
Oversupply in ships. Not only in bulk but in containers, everywhere. Hard to seperate the offer side from the demand side.
i’d imagine a big part of it is the reduction in long shipping routes for iron ore. as the Aussies ramp up their iron ore production, the number of vessels carrying ore from Brazil and Africa, and lesser so North America, will dwindle, shortening shipping times and increasing effective shipping supply. further, the North American “manufacturing renaissance” should eventually have an effect on shipping rates as well. the all-time low could be a combination of lower oil prices in the short-term, lower hard commodity demand from China as the commodity supercycle ends as well as concentration of commodity supply in nearby markets (Australia, etc) and the long-term trend of industrial reshoring in NA.
it is likely not be a major indicator as the oversupply in the shipping market has been incredibly high since 2008 so even minor changes in the supply dynamics can have a meaningful effect on shipping rates. further, ships take a long time to build so some of the ships being launched 3-5 years ago were likely ordered prior to 2008, increasing the oversupply over time.
look to DRYS for the state of the shipping market over time. its basically been terrible and getting worse since 2008 and probably won’t get better for decades as ships have long lives.
the article highlights the major factor in the steady decline in BDI rates. if the Chinese work down their inventories instead of continuing with their past import rates of iron ore, and other hard metals, this will at least temporarily depress shipping rates. shipping rates, at least in the past 10 years, are driven by Chinese iron ore imports and ship supply.
EDIT: iron ore alone makes up ~25% of dry bulk shipping so the fact that they are working down iron ore inventories now and shipping less and were shipping record amounts in the fall is likely 98% of the reason for the decline in the BDI. all other factors i mentioned likely had minimal impact. this BDI tells you nothing of the broad Chinese or global economy and only provides you a look at the Chinese’s import activity.
So the only bullish outlook for this sector is a return of German U-boats?
more specifically, German U-boats in the South China Sea.
whats going on here lately
Bought some SBLK at the absolute lows. Literally bottom ticked it at $2.57. Long DSX too. How can the value of ships swing 30% in a week? UHHH GUYS, neither of these are going BK and Oaktree is long the world at higher prices with control of the company, who was selling in the $2.50s? You’re fired.
Unrelated to dry bulk, this market is whack. Hide yo wife, hide yo kids, this is going to end badly.
^who is this noob?
al-zawahiri. geez. where have you been?
sweet calls
Decent so far, I think they will be multi-baggers over time. The industry is very ugly but capacity is coming out and pricing appears to have firmed up and is bouncing along the bottom with some greenshoots. I take small positions and can wait it out, could take a few years for the industry to really turn but probably won’t get worse imo.
I wish I could post charts onto here. I have a good one.