Tuesday, January 31, 2012

Instead of Baltic Dry, watch iron ore prices

The Baltic Dry Index, which measures dry bulk cargo shipping costs, has been dropping to levels not seen since 2008. This has generated a great deal of excitement as analysts try to determine if this decline is all driven by shipping overcapacity or is there a demand component.
MarketWatch: New super-sized ships ordered up during the era of cheap credit and surging global trade could explain the index’s 57% plunge in the last three weeks, according to Macquarie Research...
Shipping companies appear to have jinxed their own industry by ordering up too many grand ships when conditions looked very favorable before 2008.

Meanwhile, further new capacity, equivalent to 22.7% of the existing fleet, is due to be delivered this year, according to Macquarie calculations.

Baltic Dry Index (Bloomberg)

Is there a corresponding economic slowdown that is manifested at least in part in the Baltic Dry decline? To watch for signs of a global slowdown one should instead pay attention to raw commodity prices, in particular iron ore. Here is what the media has to say about the topic:
Businessweek: Iron ore headed for the worst monthly performance since October amid concern that slowing global economic growth and Europe’s sovereign-debt crisis may curb demand for the raw material used in steelmaking.
But the media tends to manipulate numbers to make their story fit. This Businessweek article was published today - why would they reference October? For that reason it is often more helpful to look at charts. The index discussed here is the average price for the 62% content iron ore delivered to the port of Tianjin (China). The index is computed by the Steel Business Briefing and represents demand levels for raw materials in China.

China import Iron Ore 62% Fe spot (CFR Tianjin port) USD/metric tonne (Bloomberg, Steel Business Briefing)

The chart shows that indeed we had a correction in the price of iron ore in October, but the index had since stabilized. With the Baltic Dry index no longer representative of global demand (at least not until 2013 when capacity is expected to stabilize), a better measure of demand is the price of iron ore delivered to China. And that index, while clearly off the highs, is certainly not falling off the cliff - for now.
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