The Baltic dry index (BDI) is used to measure the cost of shipping dry bulk, including iron ore, cement, and grain. It fell to record lows in February, measuring below 300 for the first time in its history. From a high point of 11,793 in May 2008, the fall has been dramatic, and people are worried.
The concern stems from the fact the BDI is seen by some as the temperature of the global economy and international trade. As a measure of the price of dry bulk trade, low prices can indicate slowing growth.
“We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the 90s, the 80s and the 70s, so expressions like ‘living memory’ start to apply,” Jeremy Penn, chief executive of the Baltic Exchange in London, told the Telegraph in January.
A similar BDI crash occurred before the 2008 financial crisis. “Dry bulk shipping crashed and it was one of the first indicators that showed something serious was going on in terms of the health of the global economy,” says Dalibor Gogic, principal analyst at IHS Maritime and Trade. Within the dry bulk shipping industry itself, the BDI is supposed to provide an understanding of the demand for cargo space. As of January, the average charter rate for Capesize vessels stood at about $2,700 per day.
So, what has caused the situation that now prevails? Well, it is hard to put all of the blame on one thing. This is never the case, says Gogic, adding: “Usually it is a deadly cocktail.” Into the mix throw the slowing of the Chinese economy, a large order book increasing the size of fleets, and a failure of expectations.
The Chinese downturn and shipping order book
First, China. According to analysis by Gogic and colleagues, Chinese coal imports dropped by around 30% last year, the second consecutive year that demand has fallen. “China is restructuring its economy, from commodity driven to something that is more services based,” explains Gogic. IHS Maritime and Trade’s analysis says a service-orientated economy will be driven mostly by domestic demand.
“We got used to the fact that China’s economy and Chinese demand for commodities were growing exponentially by two digits,” adds Gogic. “We just got used to it as it was a period of heavy expansion and heavy infrastructure investment.” Between 2010 and 2013, the world fleet increased and in 2011 China’s shipbuilding hit 70.2 million deadweight tonnage (DWT). So, there’s the combination of a reduction in Chinese demand and a plentiful supply of ships at play here.
“[We saw] a huge number of ships being ordered on the premise that growth would continue as it had,” says Gogic. “And, when you order a ship in 2013, you’re not going to get it delivered straight away. It takes about 18-24 months and in that time quite a few things can change.”
James Kidwell, chief executive of London-listed broker Braemar Shipping, summed it up in January: “If you’ve got more ships than there are cargoes, then freight rates are going to be weak – it is that simple.”
This point around changes in supply has also been highlighted by Tim Worstall, who writes on economics. Amid all the doom and gloom, Worstall believes that much of the panic regarding the global economy is unfounded and rather it is oversupply of ships that is to blame.
“There are two things which influence pricing: supply and demand,” he explains. If demand for shipping has dropped off a cliff then yes that’s bad, he adds, but if the supply of shipping has increased more than demand has, “then that’s only bad for ship owners and the banks they owe money to”.
“Ship owners thought that global trade would grow as fast as it has been for the past decade and more, the 8% to 10% a year sort of levels,” he continues, “so they ordered lots more new ships.” In reality, Worstall puts it at roughly 3%, so that’s less than the growth in the size of fleets. “Thus prices are dropping: it is a supply issue, not a demand one.”
Is demolition the answer?
To bring supply back into line with demand, there could be an increase in the number of demolitions. According to an article on Hellenic Shipping News from March, 144 dry bulk ships have been earmarked for demolition, the equivalent of 11.9 million DWT. A total 30 million DWT was scrapped in 2015. Ship & Bunker also reported in February that ships as young as three years old could be considered for scrap.
Gogic believes that demolishing more ships is “one of the only things that can help the market at the moment”. “Looking at the data, there is a certain percentage of ships that can be demolished. What is important to note is that some fleets are relatively young, with Capesize [vessels] there’s not many ships that can be removed from the market.”
As well as this, cancelling or delaying some parts of the current orderbook would go some way to achieving a greater balance between supply and demand. Data shows that only four new build orders were registered in the first 12 weeks of 2016. Peter Sand, chief shipping analyst at BIMCO, told Hellenic Shipping News in March: “The low level of new orders is a much needed development in the market.”
“With little to no influence over demand side developments, reducing supply is the only tool owners and operators on the dry bulk market can use to improve on the market situation.”
There have been some signs of light relief in recent weeks. A slight increase to 398 on the index – which could be attributed to the aforementioned rates of scrapping – occurred on 22 March. BDI then rose to 401 a few days later.
However, the problem is far from over. IHS Maritime and Trade’s analysis says that this year “freight rates unsurprisingly will probably remain at the historical low as market imbalance in supply and demand will continue and intensify”, adding that dry bulk seaborne trade is expected to grow insignificantly. One of the reasons why is that the current orderbook for 2016 stands at about 83 million DWT.
“We maintain the view that [the recent increase] is temporary relief, rather than a substantial recovery,” warns Gogic. “For a substantial recovery, there needs to be more cargoes.” There could be choppy waters ahead.