From Robert Wright, the FT’s transport correspondent:
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.
But it’s also worth asking if they all understand what the index is telling them.
The Baltic Exchange’s Baltic Dry Index tells shipowners and people wanting to hedge against shipping costs what is happening in the market to charter ships carrying coal and iron ore. It’s based on how much shipowners are charging charterers to move cargo. It is affected by factors like demand for cargo and supply of ships. It is a thin and volatile market, which can easily be turned by the presence or absence of a few unemployed ships off the coast of some ore, coal or wheat-exporting area.
It’s hard to find shipping industry experts who extrapolate from the big recent fall in the BDI that actual demand for iron ore or coal is falling, as the analysts talking up the fall’s importance suggest.
For a start, rates were way, way too high until the big fall. In November, it was costing charterers up to $190,000 a day to charter a Capesize ship – the biggest kind – to carry iron ore. The much-hyped plunge has brought that down to between $85,000 and $100,000 a day. That is still way above historic, long-term rates. Since most people’s operating costs are maybe $15,000 a day, it certainly isn’t time for most shipowners to give up the yacht or fifth home.
Shipbrokers also point out some Brazilian ports have been shut for repairs this month and the voyages ships would have taken from them cancelled. The closures seem to have been motivated by a mixture of things – a genuine need to repair jetties and tactics in negotiations over the big hikes in iron-ore prices the ore producers would like to impose on steel mills. Around 20 ships have probably found themselves – temporarily – without enough to do and willing to take on work at short notice at lower-than-usual rates.
Some people have even sought to attribute the fall largely to the – entirely legitimate – market tactics of one company, Taiwan Maritime Transport, even though its chief executive vigorously denies it in a story in Thursday’s FT.
But most analysts and shipowners think that, after the price negotiations and Chinese New Year, there will be too much cargo chasing too few ships again. There’s a legitimate debate about whether that’s correct but, if it is, the BDI will start shooting up.
Shipping markets are like that. Figures from PF Bassoe, a shipbroker in Oslo, say that at the beginning of last November the owner of a very large crude carrier – the biggest common size of oil tanker – might consider himself lucky to earn $25,000 a day for chartering it. Within five weeks, after a bout of panic about supply of ships, the going rate was briefly close to a record $300,000. The figure is now back to around $85,000.
The tanker figures said a lot about changing sentiment in the spot tanker market and the availability or otherwise of unemployed ships in key locations. They said very little about the wider state of the world. Most long-term watchers of the shipping industry think the same about the BDI’s fall.
Let’s remember that some of the same people talking up the fall’s importance were explaining European stock markets’ falls earlier this week without spotting the important fact a major bank had a €4.9bn hole to fill.
