The Baltic Dry Index is a leading economic indicator for global growth.
It measures world shipping rates (NB 90 per cent of the world’s trade by volume is by ship). As BBC business editor Robert Peston noted in his blog yesterday, the Index has dropped 50 per cent this week alone. Down 74 per cent since May.
There may be one or two exceptional factors depressing shipping rates, such as a decision by China (which may turn out to be temporary) to consume from its vast stockpile of iron ore rather than bring in more.
But the fall in rates is redolent of a global economy on the turn, in a pretty sharp negative direction.
It’s the backdrop to yesterday’s forecast by the IMF that the world’s economy will grow at 3% in 2009 - which is on the cusp of what it regards as a global recession.
A 50 per cent fall based on outlook alone? Even with the Baltic Dry being so volatile, that’s a huge move over a week. Fall in demand alone can’t be behind so dramatic a fall on the index. Which makes us think that actually, those “one or two exceptional factors” aren’t so extraneous.
From Yves Smith at Naked Capitalism this morning:
…letters of credit of various sorts are essential for trade. For instance, imagine the difficulty if you are, say, a Chinese manufacturer who wants to sell his wares to buyers overseas. How can he be sure the goods he ships will ever be paid for? Imagine the considerable difficulty and cost of chasing a deadbeat in a foreign country. Letters of credit. issued by banks, assure payment. They can also serve to finance the shipment (ie, fund the inventory while it is in transit).
Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks.
Yves cites a reliable banking contact who tells the tale of one shipping business in particular:
Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won’t give it to him. That means he can’t ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up.
This sounds like precisely what is behind the collapse of the Baltic Dry. Peston has it the wrong way around. It’s not that demand for goods is falling (though one assumes with the eventual slowdown it will) but rather that the supply of goods is being constricted.
Here - via the Financial Post - is what Bill Gary, of Commodity Information Systems in Oklahoma has to say:
There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit… The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.
A very short-term commodities rally sometime soon perhaps?
