The BDI (Baltic Dry Index) has been both up and down in a seemingly endless series of economic rollers.

Seasick. It is hard to follow the Baltic Dry Index (BDI) without a packet of Dramamine nearby. The BDI (at this writing) had just dropped another 39 points to 1,073, to fall to the lowest level in over a month. The composite index (Capesize, Panamax, Supramax and Handysize) for dry bulk carriers can make anyone queasy. Are we to be optimistic because at 1,073, the BDI this May is appreciably higher than the bumpy flirts with sub 600 points a year ago? After all, year-on-year that’s a 57.33% improvement and even on year-to-date, 11.65% to the good. Or should we feel uneasy that despite vessel scrapping and a significant reduction in the bulk carrier orderbook, the BDI hasn’t risen with any consistency.

It is hard not to remember that there was another May not so long ago - May 2008 -when the BDI hit 11,783 points before the descent into the abyss and a February 2009 BDI nadir of 291points.

But as the 2008-2009 period so amply illustrated with both the high and the low, global economics – commodity demand - and ocean borne commerce are closely linked. At its very essence, it is simply the supply and demand equation that sends the BDI soaring, crashing or as is the case at the moment, bumping along.

Commodity Conundrum

Dry bulk commodity demand has been something of an economic conundrum since the Great Recession. Prices have collapsed and demand, while rising has been inconsistent, not surprisingly very similar to the BDI performance. Similarly, and for much the same reasons, global GDP forecasts have been tempered.

The IMF’s (International Monetary Fund) Director of Research, Maurice Obstfeld recently blogged, “Momentum in the global economy has been building since the middle of last year, allowing us to reaffirm our earlier forecasts of higher global growth this year and next. We [IMF] project the world economy to grow at a pace of 3.5% in 2017, up from 3.1% last year, and 3.6% in 2018.”

That’s the good news. On the other side of the ledger, Obstfeld wrote, “Despite these signs of strength, many other countries will continue to struggle this year with growth rates significantly below past readings. Commodity prices have firmed since early 2016, but at low levels, and many commodity exporters remain challenged – notably in the Middle East, Africa, and Latin America…”

There has long been a perceived linkage between GDP and GDP growth and BDI.

For years, the BDI and GDP growth were in lockstep – not all that surprising with the economic globalization that took place in the 1980s. However, since the Great Recession of 2009, the BDI has plunged to historic lows, while global GDP growth fell but subsequently leveled off and is now outperforming the BDI.

Part of the reason for the disconnect was the huge orderbook which in turn led to a surplus in tonnage in virtually all sizes and sectors, whether tankers, dry bulk carriers or containerships. An utterly complete disaster in terms of ship employment. While most of that wreck is in the back-view mirror, the fundamental reasons remain.

A few months back, market investor analysts, which have over the years developed a near mystic veneration for the BDI, began again looking at investments in bulk carrier shipping.

The investment optimism sprung forth from two interrelated market trends.

Foremost of the two is the continued rise of ocean borne commodities. Clarkson, a London-based shipping research house, pointed out while the ocean movement growth rate is around 2-3% per annum in volumes terms, global seaborne trade is at a “historically high level.”

The Clarkson data notes that while 2015 saw the slowest rate of growth since the 2009 Great Depression, the trade volumes increased by 195 million tons in 2015, slightly above the average annual increase in the 1990s (180 million tons). Although lower than the average annual rise in the 2000-2008 boom years, ending in May 2008.

But Clarkson makes an important point about the current trend starting from the perspective of a much higher volume. In 2016 ocean borne cargo grew at just under 3% but added nearly 310 million tons of seaborne freight, well ahead of the boom years.

The real question is whether commodity volumes will continue to rise in turn lifting ocean borne volumes. The investment bank Morgan Stanley (MS) believes there is a “downtrend” coming in the near future.

“Business sentiment, crude oil, commodity prices and BDI [Baltic Dry Index] shipping rates all pulled the index lower,” said a team led by economist Elga Bartsch. “If [the] Morgan Stanley global trade leading indicator declines three times in a row, we will likely have established a new downtrend in global merchandise trade dynamics.” The World Bank in their April Global Monthly report was a little more optimistic writing:

“Global trade: rebound from 2016 weakness. Following a significant pickup in 16Q4, global trade continued to grow at a robust pace in 17Q1. In January and February, global goods trade volume growth reached 11% (3m-on-3m saar), its strongest pace since August 2010. Container volumes transiting through major ports also reached record post-crisis levels in February, while PMI surveys in March point to robust gains in export orders, despite a slight slowdown from the previous month. Capital goods trade, which accounts for the largest share of world goods trade, is likely to benefit from strengthening investment, especially in advanced economies. (editor italics)

Dry Bulk Fleet in Perspective

One great fundamental change in comparison to the post-crash period is the orderbook in relation to fleet size. Over the past two years scrapping activity has made a dent in the dry bulk fleet. The dent is select - mostly smaller and older vessels, with very few of the larger assets moving to the breakers. For example, in 2016 the average to the scrappers for a Handysize was 28.5, a Supramax, 22.6, Panamax 20.5 and Cape 20.2. While these advanced age numbers suggest there is a lot more tonnage that could be scrapped, it is estimated that around 7% of the dry bulk fleet is over 20 years old. Nonetheless a trend in the right direction. Simultaneously, vessel orders have declined – including postponements – giving a rise to supply and demand coming into balance in the foreseeable future. At the end of 2016, the order book was just over 10% of the existing fleet with most of these vessels scheduled for delivery in 2017 and 2018.

There have been some signs of a turnaround – albeit circumstantial data comparing utilization rates for different time periods. Data showed dry bulk shipping utilization rates fell to 69% in June 2016 as against a high of 73% in 2013 and close to 95% in 2008. BDI rates followed pretty closely to these years. Significantly, this current utilization is over 70%.

Drewry, a London-based shipping research company, is still fairly optimistic about the dry bulk sector. In this month’s Dry Bulk Forecaster the consultancy company notes that the high demolition activity and low deliveries to the fleet is expected to “grow at a slow annual rate of 1% over the next five years,” but anticipates tonne mile demand [the distance between source and delivery] “will grow at a faster pace of around 3% per annum.”

As supply and demand becomes more balanced over the forecast years, charter rates are expected to improve gradually. Interestingly, the research firm has highlighted renewables (see Matt Miller article on page 5) as an important contributor to both line haul and back hauls.