Sunday, July 11, 2010

BDI Weakens; Other Shipping Measures Are Strong

I have had some repeated requests from some loyal CD readers to get an update on the Baltic Dry Index (you can always go here on your own any time you need your "BDI fix"), which has been in decline for the last month after reaching a YTD high in late May (see chart above).  Dennis Gartman addressed this recent decline in the BDI in his newsletter on July 8, where he quoted Julian Jessop, Chief Economist of Capital Economics:

"The BDI is a composite measure of the cost of hiring a ship to transport dry bulk commodities such as grains, coal and metal ores. It is therefore understandable that the near -50% fall in the index since late May is attracting plenty of attention. However, there are two reasons to be wary of making big calls on commodities (or anything else) on the basis of the BDI. For a start, fluctuations in the index could be driven by changes in the supply of shipping as well as in the underlying demand for commodities transported by sea. For example, a fall in the BDI could reflect an increase in the number of ships available to carry dry commodities (either new-builds or conversions from other uses, such as tankers. Similarly, the BDI might be distorted by temporary port closures, changes in the cost of fuel and insurance, and many other factors."

Dennis Gartman then added, "We shall accept it for perhaps half of the decline. We might even willingly accept it for two thirds of the decline, but there is more at work here than a mere increase in supply. Demand too must be weak, and it is this weakness that has our attention."

Other shipping statistics that measure physical volumes (TEUs) rather than shipping rates have been showing positive increases in recent months, see CD posts here for the port of Los Angeles and here for the port of Seattle. Also Scott Grannis has reported recently on the ongoing strength in the HARPEX Shipping Index.  As Dennis Gartman suggests, we should definitely pay attention to the BDI if it continues to weaken, but we should also pay attention to the other indicators of shipping activity, many of which continue to show signs of strength, including the HARPEX, rail traffic, LA Port shipping volume, Seattle Port shipping, and U.S. trucking tonnage.  


At 7/11/2010 11:06 PM, Blogger Benjamin Cole said...

The economy seems to be pooping out.
Time for the Fed to get aggressive and imaginative. Qualitative and quantitative expansionism needed, and fast and big.
More and more signs of deflation ahead. Deflation would be deadly to the economy--property owners would start defaulting on mortgages even more, a torpedo right into our wobbly financial system.
What the hell is the Fed waiting for--a divine signal?
Inflation is dead, deflation setting in.
Crickey, even if the Fed should error on the upside--I would rather live through a long inflationary boom, than a long deflationary recession.
For some odd reason, I get the sense the gold bugs and the monetarists actually prefer the latter.

At 7/12/2010 10:38 AM, Anonymous gettingrational said...

The BDI is being hurt by India halting iron ore shipments to China because of violations of Indian regulations. China has been buying from Indian producers to lessen demand from Australia and thus affect prices. The one index that is up is BPI (Baltic Panama Index) which is for smaller ships.

At 7/13/2010 10:20 AM, Anonymous Zygog said...

The entire raison d'etre of the BDI is that shipping supply is fixed and therefore any change in the index is a direct measure of international demand.

So if the excuse for a falling BDI is "port closings" or "decline in ship supply" then the measure is and always was completely worthless for its intended purpose. Supply is not as inelastic as it was assumed to be.

At 7/13/2010 10:25 AM, Anonymous I Read You said...

The Ceridian Pulse of Commerce Index was down sharply in June. It measures transportation of goods by measuring diesel fuel consumption at over 7000 service stations across the country.

Although it doesn't measure rail traffic, it captures a large enough share of truck and intermodal transport to be a representative sample.

At 7/13/2010 5:55 PM, Anonymous Anonymous said...

The supply is not inelastic argument is valid but it is clear that there is trouble in the developed economies. The US and Europe are looking at a sharp decline as bankrupt banks, member countries, and states take a hit. Eventually, the dollar fails to be the reserve currency and we are looking at hyperinflation in the US and Europe. Buy gold.


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