With mainstream media claiming that the economic recovery is gaining steam here in the U.S., I thought it was time to revisit a leading indicator that I introduced a few months ago: the Baltic Dry Index.
As a refresher, the Baltic Dry Index measures the global shipping rates of transporting bulk dry commodities worldwide. It is considered a key indicator in an economic recovery, because it gauges the demand for the basic raw material inputs that go into every factor of finished goods, building materials, and food in the global economy.
The index registers a high number in an economic recovery in the global economy—because of strong demand for all commodities, such as zinc, iron ore, iron, and steel. In an economic downturn, demand falls, and so do rates
Two months ago, the indicator was at a 25-year low. The indicator has not moved much since. Granted, from its 25-year low of 842 in January, the index has moved a little higher to 931, but that is still a far cry from even October 2011, when it was at 2,173 (source: Baltic Exchange)!
It’s no surprise that the small bump up is coming from a slight increase in demand from China. Australia seems to be the beneficiary of this small increase in demand.
While rates continue to hover near 25-year lows, one aspect surrounding the shipping industry continues to rise: bankruptcies.
Many shippers from around the world are “docking” in the U.S. to file for Chapter 11 bankruptcy, because, under Chapter 11, they can continue to operate while they make concession deals with their banks in an attempt to survive until an economic recovery materializes (source: Reuters, April 3, 2012).
If shippers filed for bankruptcy in other countries, creditors would be able to seize the ships and control the companies. Shippers are hoping to operate at a loss until the economic recovery resumes to 2007 levels, so that rates will rise and they can be profitable again. I’m not holding my breath, dear reader; it is going to be a very long time before we see an economic recovery in the global economy that matches 2007 levels.
The global fleet stands at 8,900 today, but could expand by another 1,246 ships this year (source: Baltic Exchange), while the economic recovery in the global economy is nonexistent.
Unless the economic recovery speeds up fast right now, many of these ships will remain docked and idle in the global economy. Remember current rates; shippers are operating at a loss.
Considering how strange an economic recovery this has been, there is one option that shippers have. Due to strong commodity prices, a large carrier can be sold in the scrap market for roughly $20.0 million (source: Telegraph, April 9, 2012).
The average resale price for a large carrier that has served for 15 years is roughly $23.0 million (source: Telegraph, April 9, 2012). Even at this point, scraping idle older ships that are not producing revenue is a viable option. If commodity prices rise an additional 13%, the resale price will equal scrap value.
The Baltic Dry Index has not meaningfully turned upward in price, which illustrates that the economic recovery is currently not that strong in the global economy, so watch that stock market rally.
However, if there is an economic recovery in the scrap metal industry, you’ll know the reason behind it.
Where the Market Stands; Where it’s Headed:
Big day for the stock market yesterday! But what I noticed was that gold bullion prices were also strong. In recent weeks, a stronger stock market meant weaker gold prices. This wasn’t true yesterday. Is the bottom in for the correction in gold stocks? Could be close to it!
In the meantime, the stock market continues to form a top for the bear market rally in stocks that started in March of 2009.
What He Said:
“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.