We were waiting to see if it was a one-day phenomenon, but no - Wednesday’s 15 per cent rise in the Baltic Dry Index has been sustained through another day.
Wednesday’s move to 1,316 points was in fact the biggest daily increase in almost 25 years and came reportedly on signs of a recovery in raw materials trade. On Thursday the index, which tracks freight prices for ships carrying dry commodities, went on to set its highest level since October at 1,498 points. The boost came despite weakness in LME London metal prices on the day. On Friday, however, sentiment had fed well and truly through to global metal prices. Shanghai copper prices were up 5 per cent and 11 per cent in total for the week, while in London copper rose 5.3 per cent in morning trade.
Here’s a chart of the BDI’s recovery:
And just for context, here’s a longer duration chart showing the BDI’s stellar fall last quarter:
Asian shipping stocks have unsurprisingly seen a corresponding lift, boosting shares across the board in the region on Friday. Standout rallies were seen in Korea’s STX Pan Ocean which was up 4.9 per cent and Hyundai Heavy, up 3.2 per cent, meanwhile in Japan, Nippon Yusen and Kawasaki Kisen were both up 2.8 per cent.
So did this really come out of the blue? As FT Alphaville reported earlier in January, despite the bleak export data out of Korea, Taiwan and Japan, there was still a convincing uptick in the price of naphtha in the period. The move was largely attributed to a pick-up in demand from Asia. Naphtha, of course, is a key component in the making of plastics.
It is worth noting therefore that naphtha prices (chart below) have continued to strengthen throughout February.
Does this account for the sudden boost in the BDI? Quite possibly. An increase in Asian naphtha demand does after all hint of a manufacturing revival and consequent uplift in demand for freight - naturally with a lag effect.
The BDI, of course, tracks freight rates for vessels known as Capesizes, which carry raw materials. According to the FT, the demand hike comes specifically from increased Chinese buying of iron ore from Australia and Brazil. But there are positive signals for container shipping rates too, specifically those carrying export goods from Asia to Europe. The world’s largest container shipper AP Moeller-Maersk said on Wednesday it would be raising freight rates on the routes on strong indications of improving demand.
But here comes the conflicting news:
As CFR blogger Brad Setser points out, the export data out of Asia so far has hardly been indicative of any sudden trade recovery:
Macroman reports that there is a bit of optimism in the air about China right now. Loan growth was strong in January. Steel prices have picked up a bit. The latest Chinese purchasing managers survey wasn’t as bad as the last one. The fall in the pace of contraction in activity has generated hope that China’s economy will rebound later in the year. China’s stimulus will help, as will the fact that China’s state banks are liquid and have clear instructions to lend … Everyone looks at China through their own lens. My lens is the trade data. And there I still don’t find much basis for optimism. China’s January trade data isn’t out, but Korea’s data is — and it was awful. The sheer scale of the fall in Korean and Taiwanese exports shows up most cleanly if monthly exports are plotted over time.
Note the following chart:
We struggle to reconcile the two indicators.
But, even Brad Setser points out, there is potentially a plausible explanation for both. Eg. one to account for both the dire export figures of the last couple of months and the sudden boost in trade being hinted at by the increase in both the BDI and naphtha prices:
The contraction in trade finance and a one-off inventory correction (the buildup of inventories in the US — think all the cars piled up near US ports — in q4 triggered a fall in production globally) have pushed Asia’s exports down more sharply than is warranted by the fall in underlying demand. As trade finance is restored and inventories are worked off, intra-Asian and global trade will pick up again.
So it could all be down to a recovery in trade finance. This is relatively reassuring, and if true, could account for the two data sets. It infers, for one, that a sudden and swift suspension in trade finance caused the consequent sudden fall in demand for commodities and shipping rates in the latter half of 2008. Essentially, trade just froze, somewhat like a car coming to a grinding halt, but which is now slowly back on its way again - although obviously at a greatly reduced speed.
Related links:
Still plenty to worry about - Brad Setser: Follow the money
Are things really that bad in China? - FT Alphaville
