Earlier this year the world was wondering if some major economies were on the verge of tipping into sustained deflation, which can be a a damaging self-perpetuating cycle in which people stop spending as they bet prices will continue to fall.
It never happened, and “reflation” quickly became a major talking point in markets. Morgan Stanley even put out a Star Wars themed note on the topic, canvassing trade ideas an a period of rising inflation around the world.
One key input into prices is how much it costs to move things around. In recent weeks, there have been signs of a surge in the Baltic Dry index, a measure of rates for use of the giant cargo ships – known variously as Capesize, Supramax and Panamax carriers – that ferry commodities around on global trade routes. The index is provided by the Baltic Shipping exchange.
Well, a week on the rally on the index has not only continued, but accelerated.
Overnight the index rose by a further 5% to 829, the highest level seen since December 16 last year. Not only does the index sit at its 2015 high, it’s risen 62.9% from the all-time low of 509 struck on February 18.
The chart below tells the story from this year. (There’s some important context to this, which we’ll get to.)
In a website post, Peter Sand, chief shipping analyst at BIMCO, the world’s largest international shipping association, suggests the gain is dues to two factors: a rebound in the spot iron ore price and reduced supply of Capesize vessels.
“We have seen the BDI constantly go higher since end-May. Chinese iron ore fixtures has been on a slow but rising trend throughout the year, so what we are seeing now has been long coming.
But this is not all about the demand side, the lift would not have been possible without the support coming from a decreasing Capesize fleet size. Since we entered into 2015 the Capesize fleet is now short of 22 ships equal to a drop in capacity of 0.7%.
The BDI is lifted on the back of stronger Capesize earnings which has more than doubled during the month of June. Panamax earnings also improved significantly since late May”.
The chart below, supplied by BIMCO, shows the surge in freight rates for larger Capesize vessels in recent months.
While the recent rally is sharp, it does need to be put in context. Here’s the Baltic Dry index chart over the past 30 years.
From its peak of 11793 on May 20, 2008, a time when commodity prices were surging in response to increasing demand from China, freight rates fell by 93% as lower commodity prices, an oversupply of vessels and slower demand from China worked in tandem to send freight costs to an all-time contract low.
So while the index is 62.9% above its all-time low, the recovery stems from an incredibly low base.
At the same time, however, the rising prices are a sign of increased demand for transport of goods around the world, and it’s not just confined to the Capesize category, which is being affected by a shortage of cargo ships.