Baltic Dry Index (hahhaa... you can't 'print' TRADE!!)

[goldenequity]

[Zippyjuan]

Baltic Dry Index is the cost of shipping. There has been some decline in demand for ships but there has also been a huge increase in the number and capacity of ships- that has more than doubled since 2010 alone. The Index is not an economic indicator but a measure of supply and demand for shipping. Supply rose- prices fell.

http://www.forbes.com/sites/timworst.../#195fcb2021c0

Explaining The Baltic Dry Index Plunge: It's Supply, Not Demand


There’s various people out there having kittens over the manner in which the Baltic Dry Index has plunged. I think particularly of Zero Hedge. Yet the concern is almost entirely misplaced. Because the Baltic Dry is not a measure of the volume of world trade, the amount of it, but of the price of doing it for certain goods. And it simply is not true that prices depend solely upon demand. We cannot say that a price has fallen thus demand must also have done so. Price is the thing which changes in order to balance supply and demand: we must therefore consider both when attempting to explain what a price change means to us.

So, the basic news:

The continued collapse of The Baltic Dry Index remains ignored by most – besides we still have Netflix, right? But, as Dollar Vigilante’s Jeff Berwick details, it appears the worldwide ‘real’ economy has ground to a halt!! Last week, I received news from a contact who is friends with one of the biggest billionaire shipping families in the world. He told me they had no ships at sea right now, because operating them meant running at a loss.

That is of course very sad for that particular family. But does this have any impact on the rest of us? Well, no, not really.

The underlying importance is that the volume of trade is a pretty good indicator of how the global economy is doing. More trade means more growth, hurrah we’re all getting richer. So, we are in fact really rather interested in surveying the volume of global trade. However, that Baltic Dry Index is not such a measure. Rather, it is of the price which you must pay to charter a ship to conduct trade (more specifically, for large bulk cargoes, grain, iron ore, that sort of stuff). And there’s two things which interact to determine the price you must pay for anything: the demand for that thing and the supply of that thing.

At which point we get this interesting little fact:

The world fleet doubled in size between 2010 and 2013. At the same time, China doubled its shipyard capacity and took huge orders for new ships as it sought to control the commodities trade.

“The dry cargo market was used to growth approaching 10pc for quite a few years on the trot,” said James Kidwell, chief executive of London-listed broker Braemar Shipping. “All of a sudden you’ve hit a market that’s gone flat. That is a radical change.
“If you’ve got more ships than there are cargos, then freight rates are going to be weak – it’s that simple.”

It is indeed that simple. What the Baltic Dry is telling us is not that global trade has collapsed. Rather, that global trade isn’t growing as fast as the supply of ships capable of performing that global trade. Thus the price of trading has fallen.

Thus we don’t need to take this as an indication to batten down the hatches (unless we’re unfortunate enough to be ship owners) nor that the global economy is about to fall over. We don’t even need a public policy to deal with it. Low freight rates are great for the rest of us and the problem itself within the industry will be self solving. Some people will go bust, older ships will be scrapped and demand and supply will move closer together and the price will change again. This is precisely the sort of problem that the market unadorned deals with perfectly well.

Want trade volume? :

[torchbearer]

http://www.zerohedge.com/news/2015-1...oast-galveston

Something Very Strange Is Taking Place Off The Coast Of Galveston, TX

Having exposed the world yesterday to the 2-mile long line of tankers-full'o'crude heading from Iraq to the US, several weeks after reporting that China has run out of oil storage space we can now confirm that the global crude "in transit" glut is becoming gargantuan and is starting to have adverse consequences on the price of oil.While the crude oil tanker backlog in Houston reaches an almost unprecedented 39 (with combined capacity of 28.4 million barrels), as The FT reports that from China to the Gulf of Mexico, the growing flotilla of stationary supertankers is evidence that the oil price crash may still have further to run, as more than 100m barrels of crude oil and heavy fuels are being held on ships at sea (as the year-long supply glut fills up available storage on land). The storage problems are so severe in fact, that traders asking ships to go slow, and that is where we seesomething very strange occurring off the coast near Galveston, TX.



FT reports that "the amount of oil at sea is at least double the levels of earlier this year and is equivalent to more than a day of global oil supply. The numbers of vessels has been compiled by the Financial Times from satellite tracking data and industry sources."
The storage glut is unprecedented:

Off Indonesia, Malaysia and Singapore, Asia’s main oil hub, around 35m barrels of crude and shipping fuel are being stored on 14 VLCCs.

“A lot of the storage off Singapore is fuel oil as the contango is stronger,” said Petromatrix analyst Olivier Jakob. Fuel oil is mainly used in shipping and power generation.

Off China, which is on course to overtake the US as the world’s largest crude importer, five heavily laden VLCCs — each capable of carrying more than 2m barrels of oil — are parked near the ports of Qingdao, Dalian and Tianjin.

In Europe, a number of smaller tankers are facing short-term delays at Rotterdam and in the North Sea, where output is near a two-year high. In the Mediterranean a VLCC has been parked off Malta since September.

On the US Gulf Coast, tankers carrying around 20m barrels of oil are waiting to unload, Reuters reported. Crude inventories on the US Gulf Coast are at record levels.

A further 8m barrels of oil are being held off the UAE, while Iran — awaiting the end of sanctions to ramp up exports — has almost 40m barrels of fuel on its fleet of supertankers near the Strait of Hormuz. Much of this is believed to be condensate, a type of ultralight oil.

And unlike the last oil price collapse during the financial crisis only half of the oil held on the water has been put there specifically by traders looking to cash in by storing the fuel until prices recover. Instead, sky-high supertanker rates have prevented them from putting more oil into so-called floating storage, shutting off one of the safety valves that could prevent oil prices from falling further.

more article at link above

[r3volution 3.0]

I haven't looked into this very carefully, but my impression is that there was massive overbuilding of ships during the boom, then demand plummeted during the bust, and never picked back up to the level that shipbuilders were anticipating when they laid those keels. In other words, this is what should happen during a bust. Thankfully governments haven't been trying to stimulate shipping to "reflate" this bubble, as they do with other bubbles.

Incidentally, this is a good illustration of something important in Austrian Economics. During a bust resources are reallocated to more productive purposes. This always involves frictional unemployment of resources, as it takes time to retool and move equipment and so forth. But non-specific capital (or labor) can be reallocated quite efficiently. Specific capital is another matter. Massive cargo ships are very specific capital; they're not useful for anything other than transporting stuff across the oceans. So, instead of being rapidly reallocated to other purposes, there they sit, a very visible reminder of all the stuff we didn't get to enjoy, because resources were misdirected into shipping during the boom.

[Athan]

Wew lad

[Danke]