For those who believe in a long, golden era of booming commodities and happy theories about emerging markets “decoupling” from the US and its problems, we say: it’s time to look again at that fascinating gauge, the Baltic Dry Index - now more than 40 per cent down from its peak last November.
As the key measure of global shipping costs for dry bulk commodities such as grain, iron ore and coal, the BDI is the window on what CLSA’s Christopher Wood described in his client newsletter Greed & Fear last November as the “supreme cyclical indicator”.
The recent collapse of the index is a strong signal that the boom in agricultural commodity prices is about to come to an end, says Julian Jessop at Capital Economics. in the FT’s View of the Day column on Wednesday.
He notes that some observers have attributed the drop in the BDI to an increase in the number of ships able to carry dry commodities, or to temporary port closures.
But he says such a rapid fall in shipping prices seems at least as likely to reflect demand-side factors. The decline in the BDI is also a warning sign for the prices of commodities in general, Jessop adds.
“Indeed, we are sceptical of the widespread assumption that strong demand from developing economies will inevitably continue to put upward pressure on commodity prices,” he says. “In particular, continued rapid growth in Chinese demand cannot be taken for granted as the economy rebalances away from commodity-intensive investment.”
And as for commodities prices and “decoupling” theories, Lex last week gave the bad news, pointing out that the lock-step bounce in global securities markets after the Fed’s emergency 75bp rate cut on January 22 showed that decoupling has yet to take hold in financial markets. With the exception of gold, falls across a broad range of commodities - the “darlings of decoupling enthusiasts enamoured with China’s seemingly unshakable development” - were “at least a partial admission of this”, and the BDI “helped point the way”, Lex said.
However, as always, when it involves a lot of money, there are wheels within wheels. A recent theory doing the rounds of the shipping and commodities world lays blame for the slide in dry bulk shipping rates - and consequently the BDI - on a single Taiwanese shipping magnate: Nobu Su, whose privately held Taiwan Maritime Transport is the largest participant in shipping futures markets, according to the FT’s transport correspondent Robert Wright.
Wright reported last week that Su denied playing a pivotal role in the past few weeks’ decline of dry bulk shipping rates, saying it resulted from fundamental market changes.
But participants in dry bulk markets have attributed the decline in rates from last year’s record highs partly to TMT’s heavy betting on a fall in futures markets. There have also been claims from competitors that Mr Su, chief executive, has helped to push rates towards his position by chartering out some of his 130 ships at below market rates.
TMT excites strong passions because of its reputation for making large — and often successful — bets on rate movements in the futures market. It is also unique among large futures market players in owning a substantial fleet of ships.
Not surprisingly, Su through his spokesman told Wright he could not have moved the market on his own. “It’s no longer the case that one man could single-handedly influence the direction of the market,” he said. Since when, we wonder?
On the claim that TMT was chartering ships at below market rates to bolster its futures position, Su said he simply aimed to get the best price. “Sometimes it’s below the market average, sometimes above,” he said. “It just depends on the price we’re offered.”
In a separate post for FT Alphaville last week - which contains a beautifully clear explanation of BDI mechanics and how they relate to the fallout from the SocGen trading scandal - Wright examines the conspiracy theories about flailing commodities prices because, he says:
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.
