##{"id":59381,"date":"2012-01-19T11:42:29","date_gmt":"2012-01-19T00:42:29","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/01\/19\/baltic-baloney\/"},"modified":"2012-01-19T11:42:29","modified_gmt":"2012-01-19T00:42:29","slug":"baltic-baloney","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/01\/19\/baltic-baloney\/","title":{"rendered":"Baltic Baloney"},"content":{"rendered":"

\n\tBy Greg Peel<\/p>\n

\n\tThe theory is simple. Customers placing orders to buy seaborne dry goods, such as iron ore, coal and grains, have to book an ocean-going bulk carrier well in advance. Demand for ships thus leads apparent demand for commodities, and given freight rates are set on a “spot” basis determined by demand\/supply of ships, rising freight rates should indicate rising commodity prices to follow, and vice versa. At least they did up until 2010, and traders worshipped the Baltic Dry Index as a commodity price crystal ball. In 2010, the relationship broke down.<\/p>\n

\n\tAs was explained at length in an FNArena<\/span> article twelve months ago (Has The Baltic Index Gone Dry?<\/a>), one problem has been commodity price volatility post-GFC<\/span>. But the real problem has been the supply side – of ships that is – not the demand side. These hulks take years to build and thus there is a big risk of under\/oversupply across any cycle. Commodity prices were still booming into 2008 when a lot of new ship orders were placed.<\/p>\n

\n\tYour standard Panamax<\/span> and Capesize<\/span> bulk carriers are enormous. And by 2010 the number of new ships hitting the seas was accelerating. Then along came Brazilian iron ore giant Vale which decided to build its own ships to send ore to China. Originally called the Chinamax<\/span> but now dubbed the Valemax<\/span>, the first of these new vessels is now in the water with many more to follow. And they make Panamaxes<\/span> and Capesizes<\/span> look like tinnies<\/span>. You could put the Titanic in the hull of Valemax<\/span>, notes ANZ<\/span>, and still have a football field left over.<\/p>\n

\n\tIf the Baltic Dry Index had not already gone awry as a forward indicator as a fleet of new regular carriers set sail, the Valemax<\/span> about seals its fate. Aside from its size, they are producer-owned, suggesting there is no longer an “open” freight market. This actually works in the favour<\/span> of Australian iron ore producers because all up, seaborne freight rates will adjust lower. You can't commercially pull a brand new Panamax<\/span> or Capesize<\/span> out of service. (Presumably, however, you could hand over to an Italian captain and go for the insurance.)<\/p>\n

\n\tIndeed the BDI<\/span> has been trending lower since around mid last year. But as the following chart from ANZ<\/span> shows, BDI-commodity<\/span> price correlation began to fall apart in 2009. Here ANZ<\/span> uses the Aussie dollar as a reasonable commodity price proxy.<\/p>\n

\n\t $\"\"$ <\/p>\n

\n\tCommentators yet to cotton on to the demise of the BDI's<\/span> predictive powers have been warning lately that the current downward BDI<\/span> trend is heralding lower commodity prices ahead. Ignore them. That is not to say commodity prices can't go lower, it just means they could also go higher as the BDI<\/span> slides.
\n\t <\/p>\n

\n\tTechnical limitations<\/strong><\/p>\n

\n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"