Tracking the Baltic Dry Index now fairly pointless

Forget the Baltic Dry angst - world trade is growing at healthy rates

3rd Mar 15, 9:42am by David Chaston

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

Recently, ship owners have been complaining about low freight rates.

Not only are bulk carriers doing it tough, but the sea-going container trade is seeing lower rates as well.

Part of their pain is being offset by lower bunker oil costs.

Part is offset by huge new ships that allow lower unit costs. These are putting real pressure on ship owners who don't have such new equipment.

But the impression is that this is a sympton of 'struggling world trade'.

However, this is only a view for those who are looking backwards.

World trade is actually growing in value.

We are trading higher value goods. And those goods are physically smaller, requiring less freight space.

They also require less raw material which also affects transportation demand.

And much more is transported by air these days, reducing total gross sea-freight volumes.

In fact, this drive for smaller, more efficient products is affecting shipping container rates as well. The volume and value of products that can be shipped in one container is racing higher.

That is putting heavy pressure on traditional freight rates; the Baltic Dry index is near record lows, containerised shipping rates are also low.

But airfreight volumes are rising proportionately, tracking the rise in world trade. Freight tonne kilometres (FTKs) expanded +4.5% in 2014 compared to 2013; a significant improvement on growth of just +1.4% in 2013 versus 2012.

As trade body the International Air Transport Association notes, "Concerns have been rising about the health of the global economy at the start of 2015, and business confidence has weakened. But there was no sign of weakness in the December air freight data. Growth in air freight volumes reflects acceleration in world trade activity in mid-2014. In fact, the 4.9% rise in FTKs in December compared to a year ago is above the growth trend for the year overall."

And of course, the really big values in world trade are in 'services' many of which require virtually no 'shipping' in the traditional sense.

Even though it was required reading a decade ago, tracking the Baltic Dry Index is now fairly pointless if you want to keep track of early signals in world trade direction. Even tracking container sea freight rates can give faulty signals.

Airfreight volumes still command following. But as products get smaller and 'softer' and 'services' rise we will need to look for new early markers for world trade trends.

Technology is changing our world faster and in more fundamental ways than many realise.

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34 Comments

by Boatman | 3rd Mar 15, 10:35am 1425332149

Interesting perspective and food for thought

by steven | 3rd Mar 15, 11:00am 1425333600

Except pre-2008 the index was 11000, since then it has languished at the 880 mark but in the last 4 months or so has dropped steeply to 510 ish.

If David could show some correlation that in the last 6months there was a huge game changer elsewhere I might agree with him.

by cowboy | 3rd Mar 15, 11:03am 1425333834

growing in value?

after QE?

shock...

by steven | 3rd Mar 15, 11:15am 1425334500

Index,

2008 = 11000

2009~2014 = 850~1000 ish.

2015 = 510 a 40% drop in 4 odd months.

its a bulk raw material index btw.

Anyway you are trying to tell us that the bigger carriers and the value of the goods has changed significantly in just 4 months?

On top of that we see significant deflation in communications sector hardware.

Whiteware/durables? 58inch LED Samsung TVs $999NZ.

just where is value increasing?

where is the iron ore price?

http://www.indexmundi.com/commodities/?commodity=iron-ore&months=120

hmmm

Now the air freight is interesting. can it be explained? well ppl it seems are minimalising stock 9which may have been shipped as sea as its bulk, but special orders are rife? which is I assume air freight. Growth in overseas buying such as off Amazon?

It needs some deeper investigation but what sticks out for meis the huge drop ie the rate of change in just 4 months.

by profile | 3rd Mar 15, 4:10pm 1425352206

The BDI is simply a price of shipping index not a "bulk raw material" index. Supply of shipping has gone up 85% since 2008 and world industrial output has gone up 12% in this period. Coupled with this the price has fuel has dropped 40% in five months. This would suggest is it is a glut in shipping supply and reductions in fuel cost that has caused the index to tumble, rather than an decrease in trade.

http://www.wsj.com/articles/dry-bulk-shipping-carriers-launch-combined-…

http://www.aei.org/wp-content/uploads/2015/02/worldtrade.jpg

by skudiv | 3rd Mar 15, 11:17am 1425334624

And that is exactly why commodities have tanked.

by King of the whiners | 3rd Mar 15, 11:56am 1425336994

In contrast the head of the biggest shipping company of them all (Maersk) has been warning of a global trade slowdown:

“The economies in Europe are still very sluggish. Brazil, Russia and China: those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent. The only real bright spot is the US, and even the US is good but not great,” he said.

“To my mind volumes were sluggish. There is nothing in container volume numbers that suggest that the global economy is just on the verge of starting a new growth trend.”

http://www.ft.com/intl/cms/s/0/c1a51f64-be8e-11e4-a341-00144feab7de.htm…

by Mike B | 3rd Mar 15, 12:04pm 1425337466

It would be interesting to know the destinations of all this freight.

For example if freight to the US is rising then more people are buying/spending. That would, i think, give a better indication of which countries are growing rather than just say "World Trade"

by Brendon | 3rd Mar 15, 12:04pm 1425337481

Thanks David. Any idea on how NZ can get in on this growing high value yet physically small trade?

by steven | 3rd Mar 15, 1:15pm 1425341715

Software, zero transmission cost plus dont sign the TPPA.

NZ does quite well with niche, however India is still a lot cheaper.

by Andrewj | 3rd Mar 15, 1:44pm 1425343481

French factory decline even worse than Greece New orders dry up and overseas demand falls, as output contracts in France at an even faster rate than in troubled Greece http://www.telegraph.co.uk/finance/economics/11444091/French-factory-de…

by steven | 3rd Mar 15, 8:13pm 1425366817

Thats OK they will be shipping higher value goods.

by fat pat | 3rd Mar 15, 4:12pm 1425352344

Faced with deflationary forces, a feeble economy, a high USD, and global central bank easing, it seems to me that the FED will eventually start the printing press again (with a vengeance). I wonder what happens after that? At what point do people lose faith in fiat currency and rush out to borrow as much as they can to buy anything at any price? How would governments respond to that? Is it even possible to return to a sound dollar backed up by either gold or at least high interest rates? If we ever did return to such a sound dollar what would happen to asset prices? How do we go from where we are now to a sound dollar?

by Grant A | 3rd Mar 15, 7:51pm 1425365476

Fat pat - I don't know about a US feeble economy, or US deflation if oil prices turn up, but the sentiments are completely right. If faith in central banks is lost (only a matter of time to my mind but it could be a lot more time yet), then forget deflation, what we'll get is at the exact opposite end of the scale. People are showing a hell of a lot of faith in central banks currently, but when lost, fiat currency won't be worth the worthless paper it's written on.

by steven | 3rd Mar 15, 8:10pm 1425366650

Ah hyper-inflation....hyper-inflation....HYPR-INFLATION!!!!! I TELL YOU!!!

buy gold....buy GOLD!!!

said like a true believer Grant.

;]

So you poo poo OCR at 2% and therefore your position is an OCR of 8%+?

I will stay with 2% I think.

Just take one example the Great Depression on the outcome of what we are seeing now.

On top of that why the consistant belief in CBs will be seen as failures? oh I guess its the Mises/Austrian in you? Many of such ilk think the same thing, just bear in mind that's maybe <5% of the population.

Surely the failures rest with the Governments of the world and not the RBs.?

Or more likely it will be seen as the true fault lies at the feet of Wall Street and financial types, the true parasites. I think the anger at them will be deep, pervasive and probably ugly.

Consider how Kunstler sees it ending for them, not in loss of faith and taken out on the RBs but taken out on the Warren Buffets of the world with them left kissing lamposts or taken for a drag behind their limo. Meanwhile the same ppl who risk being left doing the kissing think the vast population wont blame them but the RBs? I just cant see it myself, many of the general (middle class) population are simply not stupid. PS So if that is the case (RBs get the blame) why are the financial types buying hideaways?

by fat pat | 3rd Mar 15, 11:31pm 1425378671

The Reserve Bank target of 2% inflation is just pure fantasy. Everyone knows there's basically hyperinflation occurring in the Auckland housing market and it's driven by foreign money. What chance to young people have of accumulating any wealth or financial security when house prices are >10 times the average income and rising fast.

"Too big to fail" should never have been allowed to happen. The financialization of domestic real estate should not have been allowed to happen. Ridiculous tax benefits for real estate speculation should never have been allowed to happen. THe blame lies both with governments and central banks IMHO. The top 0.1 % have been pulling the strings and reaping the benefits.

by steven | 3rd Mar 15, 8:26pm 1425367597

We get the "Great Shrink", something like the 1930s Great Depression, except we dont climb out as we wont have the energy.

by Grant A | 3rd Mar 15, 8:17pm 1425367061

This is the whole problem Steven, too many who think they know how things will play out. Go back and re-read my posting and look for the word IF. If that happened history proves what will happen, and don't tell me "it different this time." I also didn't say that 2% wasn't possible, I just said that based upon the list I gave you, that you didn't respond to, I didn't favour it - I also talked about what would, and until I see that, its my view, but I will change my mind when the facts change...right, just like you ?

by steven | 3rd Mar 15, 8:51pm 1425369076

I agree there are many opinions, however some of the fundimentals like post-peak oil are pretty over-welming for the next 40 years. That is the fact IMHO, can that change? I have been looking for that fact to change for a decade now. Then throw in how critically dependant our economy is on oil.

So how can we (as in the world) pay off the mountain of debt with a smaller economy? aka Greece wants a nullification of its debt. So default simply because the interest on the debt alone is staggering, let alone the capital and there wont be a global economy without oil on this scale anyway.

These of course are long term trends, in between we get lots of noise, false recoveries and humans acting illogically.

Bugger, sadly I missed that list I did look.

Yes I will change my mind if we see an alternative to oil and gas that has an EROEI of greater than 8 to 1, then all bets are off. Then though as Robert Hirsch said in 2005 we need 1 to 2 decades to swap over so its time as well as science against us.

by Grant A | 3rd Mar 15, 9:05pm 1425369930

The problem is Steven, and I was a big proponent of it as well, we did have peak oil, it was in May 2005. But as it turned out, it was peak conventional oil. We're now waiting for peak non-conventional oil but that could still be well away with the likes of shale oil still in its infancy. But again, when that time does comes, when prices are higher and massive research has been completed, we will likely find we have another power source not discovered yet. I suspect that by the time we have exhausted all of those other options, much of mankind won't be on this planet by then anyway, or at least it will have a choice to leave. With my investment horizon well short of that, I'm not letting it influence me to any great extent other than acknowledging that the transition periods could provide some "discomfort'.

by fat pat | 3rd Mar 15, 10:51pm 1425376274

Regarding alternative oil, this interview with geoscientist David Hughes is worth a watch. Hughes disputes the DOEs shale reserve estimates. By Hughes account, the available shale oil in the USA has been massively overstated. Unlike convention oil which has a bell shaped depletion profile, shale oil depletes exponentially (70% production decline in year one). Oh and all the low hanging fruit is now gone. I think this is probably where we're heading.

by steven | 4th Mar 15, 7:51am 1425408669

Even the EIA now says USA shale peak is before 2017 and never likely to be exceeded after that.

by steven | 4th Mar 15, 7:48am 1425408518

Indeed, originally the term peak oil was coined around conventional oil. Anything else, fracking, heavy etc is an addon. One Q I have not sen the answer to is why Hubbert apparantly didnt comment on these reserves. Back then they were of course considered un-economic to extract, the Q is are they now or are we robbing Peter to pay Paul?

"another power source not discovered yet"

I thought you liked facts?

Of May 2005, about when robert Hirsh published his paper he said then we would need at least 10 years if not 20 to move to something else, ie timescale. If you have time he's on youtube. "2005 robert hirsch oil" The thing is what is ignored by many is not just finding the alternatives but productionising them, then building them and throughout all that financing them and at a cost we can afford.

Shale oil is actually quite well established technology, just mis-applied because of excessively easy junk bonds market and get quick schemes ie investors chasing yeild who are now it seems losing their shirts.

"transition periods" are you 80 plus and in poor health? because the "discomfort' looks to within a 5~20 year time frame. So if you are in your 50/60s you like I will get to live it.

by steven | 4th Mar 15, 7:35am 1425407741

"when the facts change" do you not think Grant every time I step into this lion's den of Libertarians and right wingers anything I write is not tested? Do you not think if I got a fact wrong I wouldnt be blown out of the water?

The interesting thing is apart from your goodself and a few others (a very few) is that mostly facts are not even present to bolster a[n] [counter-]argument and hence dont do to well.

So will I change my mind? yes, because holding such a position in here would be untenable.

by Grant A | 4th Mar 15, 5:05pm 1425441942

Right wingers here Steven ? I have always thought the opposite but I guess its all a matter of personal perception. I wasn't commenting about you having a lack of facts, it wasn't a question needing facts. What I was commenting upon was that mankind adapts and evolves. The extent of shales oil reserves for instance is highly debatable, and when the price is half reasonable again I dare say there will be a wider global search for such resources, and that there is every chance that other energy sources will either be discovered or adapted. The point was that we don't know what we don't know and I'm surely not basing an investment strategy upon a view that the world will run out of resonably priced energy in my life time.

by steven | 4th Mar 15, 5:54pm 1425444899

Invariably the "right wingers" (maybe the Milton Fredman's / free marketeers then) probably the left wingers are just as dis-believing just they dont seem to pretend they know economics very much. Just cnsider that many and both sides are equally wedded to growth in order to deliver a better life for thier voters.

Not so sure we'll see that much shale oil done by the free market in the future. I suspect they will have got their fingers so badly burned they wont invest enmass for round 2. We'll see it will be interesting to watch. Now what will happen with say a 5% decline rate that looks to start in 2 or 3 years? Will Govn's rush in and do the drill baby drill?

The shale reserves are well known and plotted in the USA for one but hinge on EROEI ie Energy Return on Energy Invested, our modern economy needs 8 to 1 or better.

by steven | 4th Mar 15, 5:55pm 1425444918

"an investment strategy"

Humour me, what would you look to do if peak oil's effects are going to start to be felt inside 3 years. So a would be investor has a jump start.

As an indictor a 1% drop in oil per day = 1% drop in GDP. So the expected decline globally is 2 to 5% per annum which will be matched by global GDP.

So you have 2 ~3 years to get into position.

by profile | 4th Mar 15, 11:11am 1425420666

Oh please. You'll be amending your flawed definition of the BDI above then?

"Our analysis suggests there are ample physical oil and liquid fuel resources for the foreseeable future."

Tell us again how the IEA are liars.

by steven | 4th Mar 15, 11:52am 1425423132

Moved on from the EIA now they say peak in 2016 as it doesnt suit your ideology?

URL and date of comment?

and frankly yes its utter cr*p IMHO.

"liars" yes utter dis-information from you again.

From the IEA in 2013,

"Fortunately, the International Energy Agency (IEA), the Paris-based research arm of the major industrialized powers, recently did just that -- and the results were unexpected. While not exactly reinstalling peak oil on its throne, it did make clear that much of the talk of a perpetual gusher of American shale oil is greatly exaggerated. The exploitation of those shale reserves may delay the onset of peak oil for a year or so, the agency’s experts noted, but the long-term picture “has not changed much with the arrival of [shale oil].”

http://oilprice.com/Energy/Crude-Oil/Peak-Oil-becomes-an-Issue-Again-af…

How did your and EIA's shale oil claims pan out by the way?

didnt did they?

looks pretty much as the IEA says above.

Nov 14 outlook,

http://www.worldenergyoutlook.org/

or,

https://www.youtube.com/watch?v=uvr2olpduw0&list=UUiMPkzrVSCEDm3TatvdVy…

Now in terms of the IEA being "liars" there is indeed a considerable dis-quiet that they have been knobbled by vested interests (US Govn in particular). What I find interesting is the IEA is saying IF countries and companies invest oil outout will continue to grow, great get out isnt it?

If the output drops IEA just says not our fault they didnt invest!

Oh and this is interesting,

http://www.worldenergyoutlook.org/media/weowebsite/2014/141112_WEO_Fact…

So non-opec drops back but the IEA expects all the drop off and yet more production to be shouldered by OPEC.

yet we only have to look at much of Opec to see its declining or static, yet they are expected to pump 20mbpd more.

yeah right.

by profile | 4th Mar 15, 12:46pm 1425426369

Try looking on the IEA website in the oil section. http://www.iea.org/aboutus/faqs/oil/ "Lies and utter dis-information" yeah right - such sound logic you bring to counter this clear statement.

But hey you've been been given that link a few times and the best you can come up with to counter is "lies". Who is the ideologue here?

The EIA gets it wrong alright - failed to predict the US shale oil boom and have had to triple proven oil reserves to 1.5 trillion since 1980. A history of under estimation. But I guess one thing history has taught predictions of impending oil doom are over cooked and human ingenuity underestimated.

by steven | 4th Mar 15, 1:02pm 1425427323

Interesting. Can you prove you have given me that link? as I have never seen you link to it.

IEA's statement doesnt agree with many other professional and academic sources btw.

IEA's statement is also qualified if you read a bit further on, but then they have dug themselves into a corner saying even 10 years ago claiming conventional peak oil was decades off and I think from memory 130mbpd, where now they see more like 114mbpd.

Interesting that they assume the significant gains all come from OPEC yet OPEC doesnt see it that way.

In terms of peak oil as its original term it was indeed 2005/2006 btw.

come up with, well no try this,

https://www.youtube.com/watch?v=a9SgLIg8e-Q

As just one example of professional economists and oil geologists being way closer to the mark than the EIA or IEA.

I have no ideology on this matter, I am pointing out this is an issue and what do we do about it.

by steven | 4th Mar 15, 1:17pm 1425428279

EIA merely threw shale and heavy oil "reserves" that were considered un-economic some years ago into the "now economic" basket that previously only held conventional crude. That is however also dubious as their field model for what is a reserve assumes the sweet spots the shale drillers are now in extend for all the field, this isnt the case.

http://www.postcarbon.org/publications/drillingdeeper/

Lets not forget the 96% downgrade of a field they so enthusiastically threw into "now economic" for thier success rate on predictions.

and as for decline rates of shale,

"the average decline of oil wells in North Dakota's booming Bakken shale oil field is 44 percent per year. Individual wells can see production declines of 70 percent or more in the first year."

http://www.bloombergview.com/articles/2014-04-22/is-the-u-s-shale-boom-…

and,

http://phys.org/news/2013-10-scientists-wary-shale-oil-gas.html%20PAPER…

"Both studies show that despite a tripling of prices and of expenditures for oil exploration and development, the production of nearly all countries has been stagnant at best and more commonly is declining—and that prices do not allow for any growth in most economies.

"The many trends of declining EROIs suggest that depletion and increased exploitation rates are trumping new technological developments, Hall said."

So OPEC makes up for losses elsewhere according to IEA?

oh and,

"Hughes sums up: "Tight oil is an important contributor to the U.S. energy supply, but its long-term sustainability is questionable. It should be not be viewed as a panacea for business as usual in future U.S. energy security planning."

Which seems to be what has happened and your outlook.

Oh and an off the cuff answer in a FAQ isnt exactly a in depth argument.

by profile | 4th Mar 15, 2:45pm 1425433521

"EIA merely threw shale and heavy oil "reserves" that were considered un-economic some years ago".

Complete rubbish. It went into proven reserves when it became economic to extract - that is one of the key parameters of proven reserves. If its not ecomonic to extract companies can't put it on their books.

Speaking of oil economics:

"EOG said this month that, thanks to improved technology and cost reductions, it can make more money with oil at $65 a barrel than it did three years ago when oil was $95."

"The current oil market is an echo of the 2012 natural gas crash, in which shale producers inadvertently created a glut that hasn’t yet been resolved. In that instance, even after prices fell to the lowest level in more than a decade, gas output continued to grow, according to data from the U.S. Energy Information Administration.

That reflected the industry’s ability to adapt to lower prices by improving productivity and reducing expenses, said Bloomberg Intelligence analysts Vincent Piazza and Gurpal Dosanjh in a report this month."

http://www.bloomberg.com/news/articles/2015-03-03/l-shaped-oil-recovery…

by steven | 4th Mar 15, 6:06pm 1425445592

Actually the first and last are consistant. It wasnt in initially as it wasnt considered economc when conventional oil was $27 or less. At $85+ and with cheap junk bonds it was. Now not only are many drill sites no longer economic so to is canadian tar sands.

The thing is now will we see reserves being dropped out as their cost to extract is greater than the current price.

In any event both the above fail to EROEI test.

The "reducing expenses" is simply not to drill, or drill a lot less. That just means with 40%~70% output drops per well per year and no longer a significant number of rigs playing catch up the shale peak is looking a lot sooner, 2 years instead of 4 or 5 and drop a lot sooner as well.

If the bloomberg piece is right and its seems probable it is then that shouts huge political strife for the oil producers. ie really the price shouldnt recover until the US shale oil boom has dropped back at least 2mbpd (or this has occured elsewhere in the world). Baring a second recession and the collapse of oil demand of course. Which the BDI btw has pointed to in the past.