Sunday, June 05, 2005

Why I Am Glad I Am Not Building Ships in China Right Now

According to The COSCO group:
Around 6 billion tonnes, or 98% of world trade, is carried by sea. Coal, iron ore and crude oil predominate along with grain, rice, steel, timber, bauxite, phosphates and refined products of oil. These form the raw materials for the world's economy: fuels for industry and food for people. Baltic Exchange members arrange their transportation from the producing countries to their destination. It is the matching of ships and bulk cargoes that forms the cornerstone of the Baltic market today.

Slate on the shipping news in 2003:
Baltic Dry isn't a Latvian deodorant or an Estonian cocktail. Rather, it's a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes—150,000 tons of iron ore going from Australia to China or 150,000 tons of coal from South Africa to Taiwan. Brokers are also asked to consider variables such as the type and speed of the ship and the length of the voyage.

The answers are melded into the BDI, which appears in shipping publications such as Lloyd's List and on the screens of information vendors such as Reuters and Bloomberg. Because it provides "an assessment of the price of moving the major raw materials by sea," as the Baltic puts it, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade.

The BDI is a good leading indicator for economic growth and production. After all, it doesn't deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at People don't book freighters unless they have cargo to move.

Because the supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert—marginal increases in demand can push the index higher quickly. And significant increases in demand can push the index sharply higher. That's precisely what happened earlier this fall. As this chart shows, the Baltic Index doubled in September and October—an unprecedented jump.

You can visit the The Baltic Exchange yourself, but it's behind a subscription firewall.

You can chart it yourself here. When you do, you will see that it has been dropping steadily since mid April at 4800. This may well be foreshadowing a decline in economic activity, which in turn makes the multi-billion dollar vote-buying boondoggles of late look foolish. But, hey, the country comes first, right? Perhaps the shipping tycoon at the helm of the good ship Canada has deeper insights into the BDI than we do.