collapse of obscure Baltic Dry Index the really scary, key indicator (London Banker: 11/14/08)

[zazen]

link to article: Systemic Risk, Contagion and Trade Finance . . "

Now I need to go find out where I can keep up with this thing on a regular basis.

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.
. . .

If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn’t go to the refinery, there is no plate steel. If the plate steel doesn’t get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don’t buy. If the consumers don’t buy, there is no Christmas.

Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall. Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected.Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.

[thunder rising]

1. Well, I guess we better figure out how to make our own poisonous food and plastic junk.

[zazen]

8. Hah! I just wish we could have weaned ourselves off this in a way not fatal to poor

But we're like the drunk who's forced to get sober only after crashing into vanloads of children.

The number of the world's poor who aren't going to make it freaks me out. Haiti writ large.

[Joanne98]

2. Are u saying that the cargo shippers have been depending on credit lines?

And that their credit lines have been frozen? WOW! That's a big deal. That's kind of like the trucking industry in the US not being able to buy gas.

Which companies would this be affecting? Do u have any names?

[zazen]

10. just following same links you are (judging from your downthread post)

I suspect you understand more about this than I do. But it does seem like a larger scale trucking industry freeze-up.

What I don't understand are general contemporary export/import patterns--like, which countries are totally dependent on imports, what do we still produce here that could stay here, what's the most critical stuff (not the crap, as someone said upthread) that we import, etc.

I know we've exported a hellava lot of jobs. Guess that'd dry up.

[T_i_B]

26. "Which companies would this be affecting? Do u have any names?"

LOTS of companies, big and small. No need to name specific companies.

[Joanne98]

3. Letter of Credit

A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a presenting bank acting on its behalf, presents to the issuing bank or confirming bank, if any, on or before the expiry date of the LC, documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honour irrespective of any instructions from the applicant to the contrary. In other words, the obligation to honour (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit, however beneficiaries must balance the potential risk of payment default.

http://en.wikipedia.org/wiki/Letter_of_credit

[Rydz777]

4. I was vaguelly familiar with the Baltic Dry Index because I

had in the past read some articles about what a profitable investment these shipping lines were. They paid large dividends. Apparently no longer.

A couple of years ago I also read a comment that has stuck in my mind: "Transportation is the Achilles Heel of a globalized economy."

Thanks for the post - very interesting.

[Joanne98]

5. Shipowners Idle 20% of Bulk Vessels as Rates Collapse (Update1)

Nov. 7 (Bloomberg) -- At least 20 percent of the vessels most commonly hired to haul coal and ore are sitting empty as steelmakers cut output and dwindling trade credit halts deliveries, Lorentzen & Stemoco A/S shipbroker Kjetil Sjuve said.

Fifty to 100 so-called capesizes, each bigger than The Trump Building in New York, have been unable to find cargoes or their owners won't accept rental rates that have plunged 98 percent in five months, Sjuve said by phone today. Normally about 250 such carriers compete for spot bookings, he said.

``There are simply no cargoes,'' Sjuve said from Oslo. ``It's primarily the steel market but it's even more difficult due to financial markets and letters of credit in particular.''

ArcelorMittal, the world's biggest steelmaker, on Nov. 5 said its global output will decline by more than 30 percent. Cia. Vale do Rio Doce, the world's biggest iron-ore producer, last month said it will cut production. Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance.

Letters of credit are centuries-old instruments that transfer payments internationally from buyer to seller once shipments have been delivered.

Capesizes that were attracting rates of $233,988 a day as recently as June are now available for $4,793, according to the Baltic Exchange in London. That's below the cost of paying for crew, insurance, maintenance and lubricants.

Capesizes are the second-largest commodity transporters, after very large ore carriers. The Baltic Dry Index, a measure of shipping costs across different ship sizes, has slumped 93 percent from a record in May.

Ships at Anchor

The number of empty capesizes in the spot market may climb to as many as 150 in the next two weeks, said Sjuve, who is a capesize broker. The precise number at anchor is ``very difficult to pinpoint'' because owners don't often announce it, he said.

There are 105 capesizes indicating their status as ``at anchor,'' according to data compiled by Bloomberg. The data doesn't differentiate between ships that are hired and those that haven't got cargoes. On June 30, there were 43.

Zodiac Maritime Agencies Ltd., the shipping line managed by Israel's billionaire Ofer family, said last month it was considering idling 20 of its largest ships. Ukraine's Industrial Carriers Inc. filed for bankruptcy protection last month and London-based Britannia Bulk Holdings Plc was placed into administration under U.K. insolvency laws.

Loan Accords

As many as 20 percent of shipping lines are at risk of breaching their loan accords because the decline in rents has caused a similar plunge in ship prices, Tufton Oceanic Ltd., the world's largest shipping-hedge fund group, said last month.

The 12-member Bloomberg Dry Ships Index has plunged 76 percent from its peak in May, taking its combined market capitalization to $6.7 billion from $27.8 billion.

Global ship orders tumbled 90 percent last month, Richard Sadler, chief executive officer of Lloyd's Register, said in an interview yesterday. The full-year order tally will likely fall more than the 15 percent previously predicted, he said.

The drop in rental rates ``came fast and will be gone quickly,'' China Cosco Holdings Co. Chairman Wei Jiafu said yesterday at a shipping conference in Dalian, China. ``The unusual drop was because of investors' panic amid the global financial tsunami.''

China Cosco Holdings is the world's largest dry-bulk ships operator.

To contact the reporters on this story: Alaric Nightingale in London at [e-mail];

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoE181cv.tds&refer=home

China Ocean Shipping (Group) Company (abbreviated as COSCO) is one of the largest liner shipping companies serving companies all over the world. It is a government owned company of the People's Republic of China.

According to the company, it owns over 130 vessels (with a capacity of 320,000 twenty-foot equivalent units (TEU) and calls on over 100 ports worldwide.<1>

It ranks sixth largest in number of container ships and ninth largest in aggregate container volume in the world.<2>

The Group contains 6 listed companies and has more than 300 subsidiaries locally and abroad, providing services in freight forwarding, ship building, ship repair, terminal operation, container manufacturing, trade, financing, real estate, and IT. The Group owns and operates a variety of merchant fleet of some 600 vessels with total carrying capacity of up to 35 million metric tons of deadweight (DWT).

They are the largest dry bulk carrier in China and one of the largest dry bulk shipping operators worldwide. In addition, the Group is the largest liner carrier in China.

http://en.wikipedia.org/wiki/COSCO

[Joanne98]

6. Baltic Dry Index The Only Economic Indicator Worth Tracking

Louis Basenese writes: Forget unemployment. Inflation. Consumer confidence. Personal Incomes…

You can even ignore the ever-popular gross domestic product (GDP).

Most of the indicators that the market relies on to forecast the future are worthless in this type of environment. The truth is the data coming out of the traditional economic indicators isn't current. By the time it's being reported, the information is already weeks or even months old.

If you want to know when the global slowdown that's erased $28 trillion in wealth (so far) will finally reverse course, pay attention to the obscure Baltic Dry Index. And nothing else. Here's why…

What Is The Baltic Dry Index?

Despite the name, the Baltic Dry Index has nothing to do with markets in Lithuania, Latvia or Estonia. Instead, it's all about the cost of shipping major raw materials. Like iron ore, coal, grain, cement, copper, sand and gravel, fertilizer, even plastic granules.

The value for the index is determined by the London-based Baltic Exchange, which traces its origins back to 1744. Each day, the exchange canvasses hundreds of brokers around the world for price quotes on moving goods. For instance: Shipping 100,000 tons of coal from South Africa to Japan, or 50,000 tons of iron ore from Australia to China. It then aggregates the quotes to form the Baltic Dry Index.

Basic economic principles of supply and demand explain the significance of the index…

The supply of cargo ships is tight and inelastic. It takes roughly two years to build a new cargo ship. And the high cost of each prohibits docking ships during slow periods. In other words, a change in cargo rates does not change the number of ships in operation. So even the slightest changes in demand for shipping raw materials results in a change in the index.

And because the index tracks the cost of shipping raw materials - the precursors of economic output - instead of intermediate or finished goods, it provides a precise and rare measurement of the volume of global trade at the earliest possible stage.

A sharp move up, means global trade is increasing. Conversely, a sharp move down, means it's decreasing. Since global economic activity ultimately influences the equity markets, sharp moves in the Baltic Dry Index often predict and precede similar moves in the equity markets.

4 Reasons to Favor The Baltic Dry Index

Of course, there are other reasons to favor the Baltic Dry Index over other leading indicators, including:

No room for speculation. The index is not tradable, which means the only people booking cargo ships are those with actual cargo to ship. That makes the Baltic Dry Index, as economist Howard Simons put it, “totally devoid of speculative content.”
Not subject to revisions. Unlike almost every other piece of economic data, the Baltic Dry Index is not revised on a monthly or quarterly basis. The price is the price. And it's completely reliable.
An inability to be manipulated. Governments, both here and abroad, love to “massage” economic data, especially inflation figures. Obviously, it's difficult to base investment decisions off incomplete or “mostly” accurate data. But because of the way the Baltic Dry Index is measured, that's simply not possible. Again, the price is the price. And it's completely reliable.
Real-time, daily updates. We all know markets shift fast. And in turn, we need indicators able to reflect those sudden movements. At best, we only get weekly updates for other leading indicators. And all are backward looking. The Baltic Dry Index represents the only indicator with “real-time” updates. And such frequency dramatically increases its relevancy and value.
In light of the above, it doesn't take a market maven to predict what direction the index's been heading lately - practically straight down. Here's the thing. The Baltic Dry Index started plummeting in early June, before the global equity markets went into a tailspin, proving its predictive abilities.

So if you're looking for a clear indication of a market bottom, forget about any other leading indicator or popular convention. Just look for the Baltic Dry Index to start trending noticeably higher.

Good investing,

Lou Basenese

http://www.marketoracle.co.uk/Article7290.html

[JohnWxy]

23. Baltic Dry Index is not tradable - so NO SPECUALTIVE ACTIVITY.

IF ONLY THE SAME COULD BE SAID OF COMMODITIES FUTURES (or at least trading limited to those who trade in the actual commodities too).




"Of course, there are other reasons to favor the Baltic Dry Index over other leading indicators, including:

No room for speculation. The index is not tradable, which means the only people booking cargo ships are those with actual cargo to ship. That makes the Baltic Dry Index, as economist Howard Simons put it, “totally devoid of speculative content.” "

[zazen]

7. comment at London Banker suggested upside--great private investment opportunity

They were suggesting that this might be saved by private investors simply lending cash to the cargoes, or buying it (something like that--I'm pretty dumb about finance.)

I don't know why it made me think of Rhett Butler and blockade running, but anyway, they suggested that private investors eliminating the middleman might mean things wouldn't totally dry up.

[Joanne98]

9. Here's a website that tracks the BDI daily

http://www.dryships.com/index.cfm?get=report

[zazen]

11. there's an interesting discussion of this at Naked Capitalism, where I picked up original link

[zazen]

12. helpful chart of its recent changes at Random Roger

randomroger.blogspot.com/2008/10/baltic-dry-index.html (I can't even get link to take!)

I don't know how to cut and paste a graphic, but if someone else could that'd be helpful.

Interesting that our "collapse" now takes us back to 2001 levels. I don't really understand what that means. I'm assuming excess capacity of cargo ships (presumably built since 2001) would be figured into the Index as a cost?

[Alpharetta]

31. graphic

[Nay]

13. It's not just raw materials ships, either. My brother is a shipboard radio

operator for a union that staffs huge container carriers -- they carry finished goods in those huge tractor-trailer containers -- and this time of year he has usually had his pick of jobs. There are none available. None.

[zazen]

14. holy sh*t! n/t

[Joanne98]

15. WOW

[Strelnikov_]

18. Holy crap. 93% drop in BDI. Your brothers experience.

And this . . .

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Seems a Cat. 5 downturn is looming.

[DemReadingDU]

16. Has anyone noticed any empty shelves at Wal-mart, Target, etc?

just curious, I haven't been shopping and not sure when we might see empty shelves

[barb162]

28. No and I haven't seen empty shelves at other stores.

[knitter4democracy]

17. Globalism is expensive and dependent on cheap oil.

It's also dependent on large retail-based economies like ours propping it up.

Take yarn, for example (something I'm familiar with ;) ):
Most of the wool available for commercial uses is raised in Australia. Because of their environmental restrictions (rightfully so), most wool is scoured and processed (bleached for dying, dyed, treated to make it superwash, etc.) in China. So, the wool is shipped to China. China has some mills (some of which make very nice yarn), but a lot of yarn is milled elsewhere (Italy, Germany, Australia, South Africa, Turkey, and on and on), so the processed wool is shipped to mills all over the world.

Then, that yarn is often shipped somewhere else for distribution (yarn milled in Turkey, sent to Germany or US or wherever the yarn company's warehouses are). From there, it's shipped to yarn shops all over the world.

So, it's often at least three ocean crossings just to get yarn to the knitter, and that's most of the reason why yarn prices have been going up and up and up in these last few years. More and more of us, however, are getting our stashes down and replacing that yarn with US-made yarns or spinning it ourselves. Even then, though, there's still a good bit of oil involved, as the US mills get wool from all over the States, and often mix in Australian wool or use Australian wool exclusively even, and then ship it from there.

It's great that we can get these things from all over, but I do think we need to reconsider this "ship it all to China for processing and then all over the world from there" approach.

[GuvWurld]

19. yet another reason to shop local

especially for food (and eat less meat)

[lostnfound]

20. After an hour googling historical charts, I'm not sure this is the cataclysm that it sounds

or at least not the kind of cataclysm it seems..
The recent peaks in the index seem to be the stranger part of the story.


This was a chart from 2 years ago -- it looked like the world was ending then, too.

The newer charts are showing a dramatic plunge again -- even further than what you see below:


I read that it was massive imports to China of iron ore for steel that had caused the recent peaks. Don't know what it all means. But a 93% percent drop etc etc doesn't say much when you see the recent peaks.

[diamidue]

22. hmmm, very interesting.

That was sure a huge run-up during the past few years. Still, it is one ugly looking chart. I guess the key is to watch and see how much further (and how quickly) it drops from here.

[Rydz777]

24. Is it possible that the spikes have anything to do with China's

materials imports for construction of the Olympic facilities? I understand they were massive. In any case, the chart is very interesting. Thanks for displaying it.

[grasswire]

21. thank you (I think)

This is must read. I wish I could recommend it.

[Rydz777]

25. I came back to this thread after a couple of days to see

what was going on and was pleased to find a lot of interesting comments. You put your finger on a very interesting index. I will start tracking it regularly. It seems to be a good way to check the pulse of the health of globalization.

[CoffeeCat]

27. This BDI seems to keep falling...

...to the point where it doesn't have much more further to fall!

http://www.dryships.com/index.cfm?get=report

Please correct me if I'm wrong, but this index would seem to be pretty prescient of things to come. Many indicators that we see have all
ready been absorbed into the current economy.

This one seems to predict the shape of things to come.

So orders of everything---from wheat to steel--are falling off the charts. Is this a problem from the credit freeze, or is it
that people are just demanding less of everything and businesses aren't ordering as many materials/goods?

...just trying to understand what all of this means, because this indicator is falling like a stone in water.

[T_i_B]

29. Demand or supply?

Well companies are finding it harder to get credit to order stuff to be shipped thanks to the credit crunch, and people are buying less as well, so there's less demand anyway. It's a bt of a double economic whammy.

[JohnWxy]

30. didn't notice your plaint - two links:

http://www.geocities.com/jwalkerxy/Baltic_Dry_Index.htm