Marketwatch have an interesting piece on the Baltic Dry Index (BDI) hitting new highs under the headline “Shipping Index underlines global resilience”. Unfortunately, the headline writer does not appear to have read the balanced submission of the journo.

One observer cited in the Marketwatch article notes the demand driving the BDI comes from “the Far East”. Well, ignore its steel, cement and coal dealings and 12% to 15% of the BDI is just China and its iron ore imports. By itself. Alone. And the hot news on this front is that, for yet another year, the iron ore producers have once again spit roasted the steel mills into accepting a huge price rise on the 2008 contracts.

Why is this relevant? These new prices - a 71% hike year over year - came into force in April. China’s steel producers therefore stuffed all they could get onto available ships at pre-April prices (and before Olympic preparations taper away). And competition for the ore was in fact so heavy that spot rates in April were over 270% greater than contract.

This is the “demand” spike, such as it is. It is not “global” – “prepaid and local” might be more apt - and, in the presence of record port stocks of iron ore in China and the imminent falling away of Olympics-related demand, does not appear particularly sustainable or "resilient". But it does have a disproportionate short-term impact on freight rates because of two critical supply-side factors.

As mentioned in the prior BDI post ship bunkering costs continue to march upwards with crude. Unfortunately, the Marketwatch piece neglects mention of this factor which is directly reducing ship supply (by forcing vessels to steam more slowly in an effort to cut operating costs). Moreover, port infrastructure has been shown inadequate once these ships arrive: loading and unloading delays are running into several weeks far and wide. This also effectively reduces ship supply as the boats stand idle waiting for cargo. These are the two persistent, almost semi-structural, drivers behind the BDI’s rise.

The index is riding supply constraints – not demand “resilience”.

Sources: Clarksons, McQuilling Services

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