Let Us Not Forget The Baltic Dry

Baltic Dry Index Has Worst Week Since October as Demand Slows

By Alaric Nightingale

Aug. 7 (Bloomberg) -- The Baltic Dry Index, a measure of shipping costs for commodities, had its worst week since October as Chinese demand for shipments of coal and iron ore slowed.

The index tracking transportation costs on international trade routes today slid 135 points, or 4.6 percent, to 2,772 points, according to the Baltic Exchange. That took its weekly drop to 17 percent, the most since the end of October.

"The Chinese have backed off and it's starting to show in the number of shipments this month," Gavin Durrell, a Cape Town-based official at Island View Shipping SA, Africa's biggest commodities shipping line, said by phone today. "Iron ore and coal seem to be slowing down."

China's record coal and iron ore imports in the first half helped the index to advance as much as fivefold this year, reversing some of the record 92 percent collapse in 2008. Demand rose after the country's government announced a 4 trillion yuan ($586 billion) stimulus package.

Daily rental rates for every class of ship tracked by the bourse declined today, led by a 5.6 percent slump to $20,880 for panamaxes, ships designed to navigate the Panama Canal.

Capesizes, ships most commonly used to haul about 170,000 metric tons of iron ore around South Africa's Cape of Good Hope or Chile's Cape Horn, lost 5.2 percent to $45,428 a day. Smaller supramaxes fell 5 percent to $19,242 a day and handysize ships lost 2 percent to $12,051 a day.

Chinese Steelmakers

Rates are dropping because Chinese steelmakers are delaying imports as they negotiate annual iron ore prices with producers including Rio Tinto Group, BHP Billiton Ltd. and Vale SA, Durrell said. "I don't think they will come back until they agree," he said.

Derivatives betting on the Baltic Exchange's future assessments fell for a third day, indicating the declining spot market is causing traders' future expectations to deteriorate.

October-to-December forward freight agreements, or FFAs, for capesizes lost 4.7 percent to $36,750 a day, according to prices from Imarex ASA, a broker of the accords. That implies traders expect the market to drop 19 percent by year-end.

Panamax contracts fell 1 percent to $17,625 a day, implying a 16 percent decline.

Commentary: The Baltic Dry Index has been trending down in a narrowing channel since it peaked at 4291 in early June. The index slid 35% in only 2 months.

The primary driver on the rates increasing this spring was Chinese imports of coal, iron ore and other industrial metals as they converted their shrinking fiat currency holdings (US dollars) to hard assets. Now that the Chinese have months or years worth of these materials stockpiled the Index has one way to go….down. As a leading indicator for the global economy, this does not bode well for recovery. As the index could not even hold the 23.6% Fibonacci level of 3286, the next stop could quite possibly be the lows we saw in December 2008. If so, crude is likely to tumble, the Canadian dollar retreat, US dollar advance somewhat and stock markets correct.