Too many ships and/or an obsolete economic indicator?
November 21, 2015 10:05 PM Subscribe
The Baltic’s BDI index, which gauges the cost of shipping resources including iron ore, cement, grain, coal and fertilizer, has dropped to 498 points and is over 95 percent down from its all-time high of 11,793 points in 2008 before the financial crisis first hurt the sector.
This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
It’s important to keep in mind, though, that what the index is measuring isn’t the use of those commodities, but the shipping of them.
Judging by wait times at the Panama Canal, you'd think things are busy but that traffic jam seems to be easing.
Also previously
Also previously
I think it is a result of demand destruction as automation and globalization take out major chunks of labor and their resulting consumption.
viewed another way -
Real wages in the US have been steady or falling since 1979, with the 0.01% sucking up wealth, it isn't getting spent on consumption.
posted by MikeWarot at 10:24 PM on November 21, 2015 [3 favorites]
viewed another way -
Real wages in the US have been steady or falling since 1979, with the 0.01% sucking up wealth, it isn't getting spent on consumption.
posted by MikeWarot at 10:24 PM on November 21, 2015 [3 favorites]
Or that more shipping is of parts, semi-finished, and finished goods via containerization.
posted by the man of twists and turns at 10:25 PM on November 21, 2015 [3 favorites]
posted by the man of twists and turns at 10:25 PM on November 21, 2015 [3 favorites]
... that said, it does seem as though the cost of shipping goods -- which were reflected in the significantly higher prices of raw materials, groceries, and everything else that is shipped -- absolutely hasn't impacted the retail price of such goods, as yet.
For a long time during the early years of the Obama administration, the price of oil would go up, and the entire economy would slow... which would increase prices... which lead to lower demand... which would cause the price of fuel to go down again, and the whole process to repeat itself. There was some serious rubber-band issues going on there, with the price of oil hobbling the recovery in most states, with the exception of those which were oil-rich.
Suffice it to say, that has changed / is changing... Texas now has increasing unemployment, with job growth not keeping up with demand, and most new jobs in lower paying service industries.
Oil and gas prices are falling sharply. Assuming that there's still a glut of global production, it seems safe to anticipate that this should encourage some serious undercutting that might drive away resistance from the bigger players to cut the consumer prices of their goods.
posted by markkraft at 10:41 PM on November 21, 2015
For a long time during the early years of the Obama administration, the price of oil would go up, and the entire economy would slow... which would increase prices... which lead to lower demand... which would cause the price of fuel to go down again, and the whole process to repeat itself. There was some serious rubber-band issues going on there, with the price of oil hobbling the recovery in most states, with the exception of those which were oil-rich.
Suffice it to say, that has changed / is changing... Texas now has increasing unemployment, with job growth not keeping up with demand, and most new jobs in lower paying service industries.
Oil and gas prices are falling sharply. Assuming that there's still a glut of global production, it seems safe to anticipate that this should encourage some serious undercutting that might drive away resistance from the bigger players to cut the consumer prices of their goods.
posted by markkraft at 10:41 PM on November 21, 2015
The index isn't terribly low, there was just a big boom that set off a wave of ship building. (look at the first link) The level of the index is not the indicator, its profile over a couple of years indicates how things are going with the existing vintage of ships.
posted by hawthorne at 10:43 PM on November 21, 2015
posted by hawthorne at 10:43 PM on November 21, 2015
The question I would ask is whether this will lead to price corrections, increased economic growth, increased demand for fuel, and more "rubber banding" that restrains the economic gains, or whether the situation has fundamentally changed, and we can expect cheap oil and energy for quite some time to come.
Either way, it only makes it more important to increase efficiency, reduce demand for oil and energy, and encourage clean energy development, since we are likely to see some pretty clear gains, if we, as a society, keep it up. All the right people are going to win, and the people who are most likely to hurt as a result -- Russia, Saudi Arabia, ISIS -- kinda deserve a little more protracted pain.
posted by markkraft at 10:47 PM on November 21, 2015
Either way, it only makes it more important to increase efficiency, reduce demand for oil and energy, and encourage clean energy development, since we are likely to see some pretty clear gains, if we, as a society, keep it up. All the right people are going to win, and the people who are most likely to hurt as a result -- Russia, Saudi Arabia, ISIS -- kinda deserve a little more protracted pain.
posted by markkraft at 10:47 PM on November 21, 2015
"The index isn't terribly low, there was just a big boom that set off a wave of ship building. "
The metric obviously can't be read in the same way it used to be read, but that doesn't mean it's not still useful.
Really, any metric that tells the powers-that-be that the price of raw materials should fall, fall, fall is, by my view as a consumer, a perfectly fine metric. It's even better when people don't know how to interpret it correctly.
In other words, it's kind of an idiot metric, but a useful idiot, nonetheless.
posted by markkraft at 10:52 PM on November 21, 2015
The metric obviously can't be read in the same way it used to be read, but that doesn't mean it's not still useful.
Really, any metric that tells the powers-that-be that the price of raw materials should fall, fall, fall is, by my view as a consumer, a perfectly fine metric. It's even better when people don't know how to interpret it correctly.
In other words, it's kind of an idiot metric, but a useful idiot, nonetheless.
posted by markkraft at 10:52 PM on November 21, 2015
"there was just a big boom that set off a wave of ship building"
What do we know of these new ships? Are they more efficient vessels, ordered years ago, designed for a world of higher fuel prices, only to suddenly find themselves in an oil glut environment?
More ships, sure... but also, quite likely, more efficient ships. And that helps make the metric self-fulfilling, in itself.
posted by markkraft at 10:54 PM on November 21, 2015
What do we know of these new ships? Are they more efficient vessels, ordered years ago, designed for a world of higher fuel prices, only to suddenly find themselves in an oil glut environment?
More ships, sure... but also, quite likely, more efficient ships. And that helps make the metric self-fulfilling, in itself.
posted by markkraft at 10:54 PM on November 21, 2015
Australia's economy relies on shipping raw materials: iron ore, coal, wheat, and so forth. If less of those things are being shipped it means that we're selling less of it, which is a big problem for us.
posted by Joe in Australia at 1:15 AM on November 22, 2015 [1 favorite]
posted by Joe in Australia at 1:15 AM on November 22, 2015 [1 favorite]
What do we know of these new ships? Are they more efficient vessels, ordered years ago, designed for a world of higher fuel prices, only to suddenly find themselves in an oil glut environment? Maersk Line is my only shipping follow on twitter and they're containers. But I think the general answer is bigger, better ships.
I don't disagree that the index is useful , BTW.
RBA index of commodity prices. Ooh, it's better than If less of those things are being shipped it means that we're selling less of it, which is a big problem for us. We've spent the years of the commodity price boom giving the rich big tax cuts and paying huge subsidies to foreign companies so they can build capacity (railways, ports) to export and now they're ready to sell it and we won't get any royalties.
posted by hawthorne at 1:35 AM on November 22, 2015
I don't disagree that the index is useful , BTW.
RBA index of commodity prices. Ooh, it's better than If less of those things are being shipped it means that we're selling less of it, which is a big problem for us. We've spent the years of the commodity price boom giving the rich big tax cuts and paying huge subsidies to foreign companies so they can build capacity (railways, ports) to export and now they're ready to sell it and we won't get any royalties.
posted by hawthorne at 1:35 AM on November 22, 2015
We've spent the years of the commodity price boom giving the rich big tax cuts and paying huge subsidies to foreign companies so they can build capacity (railways, ports) to export and now they're ready to sell it and we won't get any royalties.
At the same time as letting the high dollar hamstring eastern state manufacturing so that there is less to fall back on now that the resources boom is off the boil. Australia really is terrible at this game.
posted by deadwax at 3:45 AM on November 22, 2015
At the same time as letting the high dollar hamstring eastern state manufacturing so that there is less to fall back on now that the resources boom is off the boil. Australia really is terrible at this game.
posted by deadwax at 3:45 AM on November 22, 2015
It's hard for me to think of any industry that might gracefully withstand a fall in prices of 95% from peak. I don't think even the housing bust here in the US was that dramatic.
posted by newdaddy at 5:11 AM on November 22, 2015
posted by newdaddy at 5:11 AM on November 22, 2015
It's the combination of a boom making anchoring to old prices silly and a huge capital cycle that has led to excess capacity with lower marginal costs. Actual bulk volumes are only down slightly.
That and the index itself is pretty wacky/illiquid
posted by JPD at 5:47 AM on November 22, 2015 [5 favorites]
That and the index itself is pretty wacky/illiquid
posted by JPD at 5:47 AM on November 22, 2015 [5 favorites]
JPD: I love when you come into any finance thread, slinging common sense and industry knowledge.
posted by leotrotsky at 7:05 AM on November 22, 2015 [2 favorites]
posted by leotrotsky at 7:05 AM on November 22, 2015 [2 favorites]
It's the combination of a boom making anchoring to old prices silly and a huge capital cycle that has led to excess capacity with lower marginal costs. Actual bulk volumes are only down slightly.
There has also been consolidation of the shipping business and some of the major players are engaging in a price war to cripple smaller competitors so they can be bought up or driven under.
posted by srboisvert at 7:15 AM on November 22, 2015
There has also been consolidation of the shipping business and some of the major players are engaging in a price war to cripple smaller competitors so they can be bought up or driven under.
posted by srboisvert at 7:15 AM on November 22, 2015
The current lows in the BDI are about 80% a reflection of current weak steel demand and 20% everything else, including oversupply of vessels.
The demand for steel is volatile in the best of times, fueling volatility in demand for iron ore and met coal bulk cargos. The demand for heat, light and food, and hence the demand for two other key bulk cargos of thermal coal and grain, is much more predictable.
This effects the index in two ways. Directly, iron ore and met coal are the big variable demand in the pricing equation. Indirectly, thermal coal and grain buyers use the predictability of their shipping requirements to shift their provision of shipping from spot market and shorter time charters (measured by the BDI) to very long term time charters and owning / leasing their own vessels (measured poorly or not at all by the BDI).
posted by MattD at 7:28 AM on November 22, 2015
The demand for steel is volatile in the best of times, fueling volatility in demand for iron ore and met coal bulk cargos. The demand for heat, light and food, and hence the demand for two other key bulk cargos of thermal coal and grain, is much more predictable.
This effects the index in two ways. Directly, iron ore and met coal are the big variable demand in the pricing equation. Indirectly, thermal coal and grain buyers use the predictability of their shipping requirements to shift their provision of shipping from spot market and shorter time charters (measured by the BDI) to very long term time charters and owning / leasing their own vessels (measured poorly or not at all by the BDI).
posted by MattD at 7:28 AM on November 22, 2015
MattD arent seaborne iron ore volumes up? The big fours production is up. I thought much of the reduction in demand has come from mothballing local Chinese production.
posted by JPD at 8:09 AM on November 22, 2015
posted by JPD at 8:09 AM on November 22, 2015
This related NPR story Talks about the impact on the rail industry from declining use of coal.
posted by humanfont at 8:31 AM on November 22, 2015 [1 favorite]
posted by humanfont at 8:31 AM on November 22, 2015 [1 favorite]
deadwax: " Australia really is terrible at this game."
Is any country with heavy resource exports good at this game? Canada certainly isn't.
posted by Mitheral at 9:59 AM on November 22, 2015 [1 favorite]
Is any country with heavy resource exports good at this game? Canada certainly isn't.
posted by Mitheral at 9:59 AM on November 22, 2015 [1 favorite]
As a general trend, the shipping companies are cutting costs (including fuel costs but also labor and infrastructure) by moving to larger ships so they have to make fewer trips to fewer ports of call. Several of the large shipping lines have formed alliances and are moving their cargo together. This benefits larger ports that have cranes tall enough and water deep enough to handle the mega ships but leaves smaller ports on the outside looking in.
Also, don't believe anything the railroads say about losing money are declining profits, those crooked fuckers are making money hand over fist.
posted by The Hamms Bear at 7:04 PM on November 22, 2015
Also, don't believe anything the railroads say about losing money are declining profits, those crooked fuckers are making money hand over fist.
posted by The Hamms Bear at 7:04 PM on November 22, 2015
What if it just shows that more money is trading hands in exchange for intangible goods (e.g. higher priced branded products, knowledge, entertainment, labor, and services) than physical goods?
I expect this is a slow and gradual shift, not capable of explaining the full volatility of the index. Keep in mind the magnitude of the phenomenon is that it was twice as expensive in August, and three times as expensive a year ago.
Or that more shipping is of parts, semi-finished, and finished goods via containerization.
It's important to note that Baltic Dry is not about finished or semifinished goods. It's about shipping dry goods, in which the ship is the container. These are generally raw materials. What this mostly means is that Chinese demand for iron and coal has been declining lately, and this reinforces the notion that the commodities slump is not about too much supply, from say, OPEC or some other cartel, but decreased demand.
The general process is:
Raw materials mined -> dry good barges -> factories -> finished goods in containers
If you want to know about containers, look at HARPEX. That covers the containership routes you might care about, that would carry parts. The cheaper it is to ship goods via container, the more distributed you can expect a supply chain to be, based on whoever has the lowest cost of labor at whatever skill point required. That chart shows a fairly different 1 year chart. Some of that could be lag -- the factories step takes time -- but there could be a substantial local consumption component to the raw materials China imports. It takes a lot of energy and steel to build high rises at the rate China's been going at, after all.
The question I would ask is whether this will lead to price corrections, increased economic growth, increased demand for fuel, and more "rubber banding" that restrains the economic gains, or whether the situation has fundamentally changed, and we can expect cheap oil and energy for quite some time to come.
What you call "rubber banding" is basically the business cycle. And this situation is almost entirely based on the Chinese business cycle, and how much of their growth was viable, and how much was malinvestment that should not and shall not be resumed. This is a tough question to answer, as official reports are not considered trustworthy or reliable. The markets offer us some predictions Oil futures chains. What you're looking at is a contract to deliver oil to a specific place on a specific day each month, out to Dec 2021. The prediction suggests that prices will go up, but not anywhere like where they were on average in the last decade.
posted by pwnguin at 10:29 PM on November 22, 2015 [2 favorites]
I expect this is a slow and gradual shift, not capable of explaining the full volatility of the index. Keep in mind the magnitude of the phenomenon is that it was twice as expensive in August, and three times as expensive a year ago.
Or that more shipping is of parts, semi-finished, and finished goods via containerization.
It's important to note that Baltic Dry is not about finished or semifinished goods. It's about shipping dry goods, in which the ship is the container. These are generally raw materials. What this mostly means is that Chinese demand for iron and coal has been declining lately, and this reinforces the notion that the commodities slump is not about too much supply, from say, OPEC or some other cartel, but decreased demand.
The general process is:
Raw materials mined -> dry good barges -> factories -> finished goods in containers
If you want to know about containers, look at HARPEX. That covers the containership routes you might care about, that would carry parts. The cheaper it is to ship goods via container, the more distributed you can expect a supply chain to be, based on whoever has the lowest cost of labor at whatever skill point required. That chart shows a fairly different 1 year chart. Some of that could be lag -- the factories step takes time -- but there could be a substantial local consumption component to the raw materials China imports. It takes a lot of energy and steel to build high rises at the rate China's been going at, after all.
The question I would ask is whether this will lead to price corrections, increased economic growth, increased demand for fuel, and more "rubber banding" that restrains the economic gains, or whether the situation has fundamentally changed, and we can expect cheap oil and energy for quite some time to come.
What you call "rubber banding" is basically the business cycle. And this situation is almost entirely based on the Chinese business cycle, and how much of their growth was viable, and how much was malinvestment that should not and shall not be resumed. This is a tough question to answer, as official reports are not considered trustworthy or reliable. The markets offer us some predictions Oil futures chains. What you're looking at is a contract to deliver oil to a specific place on a specific day each month, out to Dec 2021. The prediction suggests that prices will go up, but not anywhere like where they were on average in the last decade.
posted by pwnguin at 10:29 PM on November 22, 2015 [2 favorites]
Leaky Ships: Ocean Carriers in the Age of Profitless Shipping - "Why are ocean freight rates so low?"
posted by kliuless at 5:43 PM on November 24, 2015 [1 favorite]
posted by kliuless at 5:43 PM on November 24, 2015 [1 favorite]
"Why are ocean freight rates so low?"
For some reason, I think it's pretty cool that you can see the Chinese new year in that graph.
posted by pwnguin at 7:04 PM on November 24, 2015 [1 favorite]
For some reason, I think it's pretty cool that you can see the Chinese new year in that graph.
posted by pwnguin at 7:04 PM on November 24, 2015 [1 favorite]
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