The Baltic Dry Index (BDI), a basket of shipping rates closely watched as a leading indicator of economic growth, has lost over 40 per cent since late May. While the BDI is infamously volatile, the parallel with 2008, when late May turned out to be the peak before a 95 per cent decline that presaged the September banking crisis, is unsettling. Should investors be worried?
The BDI tracks spot freight rates for dry bulk cargos such as iron ore and coal. It recovered sharply last year because China's post-crisis efforts to pump-prime its economy required a huge inflow of raw materials. But now that the economic needle in China has swung towards inflation, the government wants to slow production. Demand for the so-called 'capesize' vessels that transport iron ore has slackened in particular. Heavy manufacturing is under pressure in China because the authorities have a long-term objective of rebalancing the economy towards greener, more local sectors.
But the spot rates behind the BDI are also driven by the supply of ships. The mining boom of 2008 sparked a flurry of vessel orders that turned sour when demand collapsed. Yet the Asian recovery meant there were fewer cancellations than expected, so this year the industry faces a whopping 17 per cent expansion in dry bulk tonnage, estimates Henriette van Niekerk at the ship broker Clarksons. If that's not matched by demand, basic economics suggests rates should plunge.
This is a problem for ship owners like such as Goldenport. The company's exposure to volatile spot rates is limited because its ships are contracted out many months in advance, but contract rates will follow longer-term trends in the spot price. That said, ship owners also make money by buying and selling ships, and with ship values low but rising Goldenport has announced a £24m placing in late June to fund vessel purchases. Clarksons and its rival Braemar have also both reported strong performances, having brokered purchases by cash-rich shipping magnates sniffing out bargains.
IC VIEW:
China's hunger for iron ore and coal may be abating, but growth is still strong and rebalancing the economy will take years. It's more likely that excess supply of ships is behind the latest plunge in the BDI. That's bad news for parts of the shipping industry, but less so for the economy as a whole. No one yet expects wholesale demand erosion on the scale of 2008.
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