Baltic Dry Index

The game started.

AP Moller Maersk, the world’s largest container shipping firm, surprised the market on Wednesday with the announcement of a DKK9.2bn ($1.77bn) share placing.
The move was unexpected since the Danish firm had pretty much ruled-out the prospect of any fund-raising on August 21, the day it also announced a loss - its first ever - of $540m.
As Lloyds List reported at the time, chief executive Nils Andersen told investors the shortfall had come despite revenues of $22.7bn, on a major loss to the container division of $961m. While the results were not pretty, investors warmed to the promise of aggressive restructuring measures to come: shares moved 7 per cent higher after Andersen said the group would trim between$1bn-$1.5bn from annual costs.

Sphere: Related Content

The Baltic Dry Index revisited

The Baltic Dry Index is a strange animal.
Some analists think that it is a measure for international trade flows.
The Baltic Dry Index, or BDI, is an index that tracks a blending of rates to ship dry goods - basic raw materials like iron, coal and grains - on three different-sized boats on the four main shipping routes.
Conventional wisdom - or perhaps just tradition - has analysts looking at the BDI as a leading indicator of how commodities and the global economy will perform. The old adage is that no one hires a ship unless they have something to transport, and if people are transporting things, that means they're buying and selling.

However, the correlation between commodities and/or stock indices seems to be weak. Even when you compare the BDI to the shipping companies themselves the relation is minor. Look to the Claymore/Delta Global Shipping Index ETF (ticker: SEA).

Sphere: Related Content

Love Boat

On the site Infectious Greed we found the following:

There is a kind of oceanic traffic jam out there among very large crude carriers (VLCCs), with something like 7% (according to Lloyd's) of them storing crude oil off the coast of Europe, Asia, or North America in anticipation of higher prices later this year. Such are the joys of contango -- higher forward prices making it profitable to store petroleum for future sale -- but it is a huge gamble. If the people contracting for such VLCCs are wrong, their carrying costs mount and it becomes likely that they just dumb the product on the markets, further depressing prices.

Check the following figure (from EA Gibson) of the current storage situation for both petroleum and clean products, like gasoil:. While crude sea storage has declined from its peak earlier this year, clean products are floating out there is ever larger amounts.

Sphere: Related Content

Load my boat

Sometimes we can look to this worldwide crisis from a different angle. We have a picture from vesseltracker.com. It shows the container ships off the coast of Singapore. Green means: yes there is activity, red says: we’re just hanging around. It’s another way to show us how limited shipping activity is on the largest parking lot on earth.
From International Economy:

The world's busiest port for container traffic, Singapore saw its year-over-year volume drop by 19.6 percent in January 2009, followed by a 19.8 percent drop in February. As of mid-March 2009, 11.3 percent of the world's shipping capacity, sat idles, a record.

If this anecdote proves to be symptomatic, where will the rally in the container stocks leading us?
We look to DRYS.

Sphere: Related Content

Titanic

According to Bloomberg: About 45 percent of U.S. rigs have been shut since September, which means fourth-quarter gas production will tumble 5.2 percent, faster than the 1.9 percent decline in use, the Energy Department forecast. Prices will rise to $7 per million British thermal units by January from $3.897 today on the New York Mercantile Exchange, according to a Bloomberg News survey of 20 analysts. The gain would be the largest since the first half of 2008.

But this is Bloomberg.
We become a little prudent as prices are going nowhere.
Last weeks we mentioned natural gas and copper.
All their upward price movements are stalled.
Even de Baltic Dry index is not going higher for the moment. Now be careful with charts where you can click in the box for a log scale of not.
As markets are at the bottom charts without logarithmic scaling are less sexy than with a log scale.

But anyway…

Rapidly deteriorating conditions in the shipping sector are squeezing the ratings on European banks exposed to the shipping industry. Many shipping companies are struggling following a sharp downturn in global trade and challenging funding conditions. We expect these difficulties to result in a material increase in banks’ loan loss provisions. We see pressure on banks coming from an increasing number of loan defaults, rapidly deteriorating shipping company credit quality, and weaker recovery expectations due to falling asset values. In addition, we believe banks’ capital ratios may decline as deteriorating creditworthiness feeds through internal rating models and increases the relative risk-weighting under Basel II.

European banks are especially exposed to drybulk and container shipping, the fundamentals of which are “particularly weak.”
The S&P analysts highlighted seven banks with significant shipping exposures - DnB NO, DVB, KfW IPEX-Bank, NIBC, HSH Nordbank, Norddeutsche Landesbank Girozentrale and Nordea.

Sphere: Related Content

Not everything is gloom and doom

How bad things may look, I believe we’re moving – o, so slowly – in the right direction.

Every other day we move in the direction of a better understanding our problems and we’re able to address them. Things seem to become worse, but the purification process is running and that is a good thing.

An example: during his House Financial Services Committee testimony last Tuesday, the Fed Chairman paralleled the Treasury Secretary’s stress test to FDR’s bank holiday. The Chairman explained, “An interesting historical example is the bank holiday of 1933 when Roosevelt shut down the banks for a week, and said we are just going to check the books and open them up only when we think they are solvent. And a lot of the banks opened up pretty quick. So, it's not really clear that how much they really looked through the books, but when they opened them up again, people felt much more comfortable and more confident in the bank. And part of the proposal that Secretary Geithner put out this morning is to have a supervisory review, not only of the quality of assets reserving and the potential future losses, but also to ask a very important question: How well would the banks do in a very -- even more severe scenario?”

Nobody would have talked about this 6 months ago.

The problems are defined now but investors are waiting before willing to march on.
We look at a couple of economic indicators where a flattening seems to be underway. Too early to call the bottom. But a change we have to pay attention to.
We show copper:

And the Homebuilder ETF (ticker: XHB):


The Baltic Dry Index (ticker: BDI) is another piece in the puzzle:

Sphere: Related Content

A come-back

Yesterday we mentioned the 15% rise in the Baltic Dry Index on Wednesday. On Thursday the index went to 1498 points or the highest level since October. And today we observe that sentiment had fed through global metal prices. London copper rose 5.3% this morning.
Even more: Asian shipping stocks have seen a corresponding lift.
According to the Financial Times demand is stronger from the Chinese; they are buying iron ore from Australia and Brazil. And AP Moeller-Maersk said that due to improving demand the freight rates will be brought up.
What can be the reason behind this move?
Are inventories worked off? We think both things happened: a contraction in trade finance and a one-off inventory correction have pushed Asia’s exports down more sharply in the 4th quarter of 2008 than was warranted by the fall in underlying demand. Now trade financing is picking up and inventories are worked off, the train –grinded to a halt – is now slowly on its way again.

Yesterday we showed Chinese shares, today we offer a renko chart of Dry Ships – o yeah babe…

Sphere: Related Content

Jump off this ship

For today’s renko chart we selected another name which is not too afraid to expose some volatility. The price can dance as Obama on his inauguration night. We’re talking about Dry Ships (ticker: DRYS). We know that rate for ships came down dramatically as the freight traffic imploded. But containers and/or bulk commodities have to be moved. And not for free.
As one looks to the normal chart nothing seems to be moving. But the renko chart shows us that a negative trend is evolving.

Sphere: Related Content