International Trade Whither it goest?

What are the trend lines we follow to see where the world economy is going? As long noted on this blog, one trend line is the "Baltic Dry Index." As set out in 2009:

As to why the Baltic Dry Index (BDI) works as an indicator, see here:

The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.

As noted here,

The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:

Just last month, the Marketplace radio folks said Economic eyes again turn to the Baltic Dry Index, but there may be more to a decline in current days than declining markets -

And there's another reason for thinking that the big drop in the Baltic Dry Index may not be as menacing as it seems. The cost of shipping reflects not only the demand for raw materials, but also the supply of ships. Amir Alizandeh of the Cass Business School has been studying the accuracy of the Index as an economic predictor.

"If you have too many ships around, then this will result in a drop in the index," he says. "And that's the situation at the moment: We have too many ships chasing not enough cargoes."

The economic boom that preceded the collapse of Lehman Brothers had triggered a ship-building frenzy. All those extra ships have now been delivered, and the world has 60 percent more bulk carrying vessels than it needs.

So, when you seen a chart like the one below on Bloomberg, it may be too many hulls (in this case, Panamax hulls) chasing too few cargoes.

Which allows you to understand headlines like Baltic Dry Index weighed down by Panamax.

Just a reminder to know the background of any index you might plan to use to foresee the future.

Space Station Keeps Watch on World's Sea Traffic

Ever wonder what the world's sea traffic would look like from space? If so, here's an interesting piece from NASA and the ESA, "Space Station Keeps Watch on World's Sea Traffic":

As the International Space Station circles Earth, it has been tracking individual ships crossing the seas beneath. An investigation hosted by the European Space Agency (ESA) in its Columbus module has been testing the viability of monitoring global maritime traffic from the station's orbit hundreds of miles (kilometers) above since June 2010.

The ship-detection system being tested is based on the Automatic Identification System, or AIS, the marine equivalent of the air traffic control system.

All international vessels, cargo ships above certain weights and passenger carriers of all sizes must carry "Class A" AIS transponders, broadcasting continually updated data, such as identity, position, course, speed, ship particulars, cargo and voyage information to and from other vessels and shore.
***
The results of the analyses have been very good. On a good day, approximately 400,000 ship position reports are received from more than 22,000 different ship identification numbers (Maritime Mobile Service Identity, or MMSI). In a summary made in Oct. 2011, the total number of position reports received exceeded 110 million messages from more than 82,000 different MMSI numbers.
***
The Vessel Identification System, or VIS, could potentially be beneficial to many European entities, particularly in assisting them in law enforcement, fishery control campaigns, maritime border control, maritime safety and security issues, including marine pollution surveys, search and rescue and anti-piracy. Various service entities have already been asking to get access to the VIS data, which is continuously acquired on Columbus.

Here's the image of one day's traffic:

Ship position reports received with the NORAIS Receiver during 24 hours, 29th June 2010. (FFI)

Sea commerce, sea lines of communication, choke points, oh my!

Global Shipping Worry: "China is living hand to mouth . . ."

A "Bulker"

In the past, we have looked at the world of "dry bulk" shipping to gauge the direction of the global economy - high demand for such shipping equates to a growing economy, low demand, well, not so much.

China, measured by dry bulk shipping, has become a matter of some concern in certain circles, as reported at here":

The Baltic Exchange's main sea freight index, which tracks rates for ships carrying dry commodities was flat on Monday, as weak Chinese demand weighed on rates for dry bulk vessels.

***

China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April.

Analysts expect the dry bulk segment to face short-term weakness as Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries to weather the current slide in steel and raw material costs.

Well, there was a brief bump up a day or so ago on the Baltic Dry Index when China announced a continuation of its "growth" plan, but . . . here's graph of the BDI:

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View the full INDEX:BDIY chart at Wikinvest

Which means that the demand for hulls to ship stuff is weak and that means that a key leading indicator is not looking good for an improved global economy. Keep an eye on this and in the trans-Pacific container shipping business.

UPDATE: Oh, that title quote? From The Guardian here:

Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and defaulting on their contracts, the Financial Times reported on Monday.
The newspaper cites traders as saying the deferrals and defaults, which have only emerged in the last few days, have contributed to a drop in iron ore and coal prices.
"We have some clients in China asking us this week to defer volumes," a senior executive with an unnamed global commodities trading house is quoted as saying.
The deferrals are described by the FT as the clearest sign yet of the impact of the country's economic slowdown on the global raw materials markets.
"China is hand to mouth at the moment," the unnamed source is quoted as saying.

The BDI described here:

Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.

Gulf of Guinea Pirates: Driving Up Freight Rates

West Africa Piracy 2012 (to date) - IMB Map

Platts reports an increase in shipping rates from Europe to West Africa due to piracy issues - at Piracy fears push NWE-WAF clean freight above NWE-US Atlantic Coast:

Clean freight rates for cargoes loading in Northwest Europe and discharging in West Africa are higher than for cargoes discharging in the US Atlantic Coast, Platts data shows, with shipping sources saying Thursday this is due to fears of piracy.***

The technical explanation has do to with the need to spend more time steaming farther off shore to limit piracy risks that rise with anchoring inshore.

Recommended Reading: Prime Movers of Globalization by Vaclav Smil

These days there are too few books that set out to inform you of some aspect of life that you may know nothing about in a few, well-chosen words. I recently finished* reading one such book from The MIT Press Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines. A "prime mover" in an engineering sense is a primary source of power. But it is also the driving force of some sort of change - and makes the book's title very apt.

In essence, Professor Smil reflects on the changes wrought in global commerce by the development of reliable, low cost and efficient motive power for large ships and large aircraft.

This has, in his view, allowed the spread of international commerce and travel by lowering the costs per unit of travel and created the situation where assembly plants in the United States safely can rely on the "just in time" delivery of components from far distant lands at minimal cost for transportation. The huge diesel engines driving container ships that are as large as aircraft carriers has made it possible for goods to flow across the ocean and raised the economic well-being of both shipper country and consumer country. Grapes from Chile and clothing from Vietnam, fish products from Thailand all arrive at our Wal-Marts, Costco and local groceries without much thought of shipping expense. Crude oil from the Middle East travels cheap to Houston for refining. All due to the diesel engines that propel giant ships.

Wärtsilä RT-flex96C is a two-stroke turbocharged low-speed diesel engine designed by the Finnish manufacturer Wärtsilä. It is currently considered the largest reciprocating engine in the world, designed for large container ships, running on heavy fuel oil.

The General Electric GEnx (General Electric Next-generation) is an advanced dual rotor, axial flow, high-bypass turbofan jet engine in production by GE Aviation for the Boeing 787 and 747-8. The GEnx is intended to replace the CF6 in GE's product line.

The other night I overheard some parents discussing the difference between their own teen years and those of their kids. Once comment reflected that both domestic and international air travel was cheap and easy now - but when they were younger, a trip to the beach was a luxury. Almost no one could afford to fly just for fun. Professor Smil points to the efficiencies of the gas turbine engines that power the modern aircraft - which in turn allows larger aircraft to carry more people cheaply.

So, it may not be in your local library, but I highly recommend getting a copy of Prime Movers of Globalization: The History and Impact of Diesel Engines and Gas Turbines for an educational and thought-provoking read.

A good sample from Chapter 7:

A very large diesel powered oil tanker - moves crude oil very inexpensively

The expectations created by the rising globalization of trade and travel or both understandable and problematic. Affluent consumers (and richer urbanites in low-income countries) now take for granted that basic manufactured goods should be fairly inexpensive (and in terms of average purchasing power, actually progressively cheaper) and that they should have access to an unprecedented range of foodstuffs and products. The producers of these goods for distant markets (whether Chinese assemblers of toys and laptops or Chilean or South African growers of grapes and pears) have come to expect that their output will continue to be in demand in ever greater quantities. Leisure and business trips on an intercontinental scale have become routine for hundreds for hundreds of millions of travelers, resulting in previously unthinkable personal experiences and productive ventures, and airlines anticipate further large increases of their aggregate passenger and cargo capacities. The beneficiaries of the process expect its rewards to continue, but they do not appreciate how fragile this arrangement is and how impermanent it may turn out to be in the long run.

The fragility of the system he describes is not to the diesel or gas turbine engines - but rather, as we have seen in the last few years- to unexpected bumps in the underlying economic systems creating a cascading impact on demand and then supply. It is not the engines that get laid up as demand decreases but rather the hulls they operate in.

See also my earlier post on Things to Consider.


* "Recently finished" only because I had buried it other a bunch of far less relevant books.

Shipping - Economic Indicator

In a post from December 2008, here, I noted an expert reporting the decline in shipping as an economic predictor that boded ill for 2009, which, as we all know now, was pretty accurate.

Now, trends in shipping may be signaling a shift toward an end to the current economic mess.

First, a headline from Lloydslist - China ore demand ties up one fifth of capesize fleet. China is spending money and boosting shipping. That's a good thing.

Then, some thoughts from Time:

. . . Never before have so many experts and ordinary folk been so busy trying to gauge the timing and strength of the eventual worldwide economic rebound. One of the best indicators is found in the shipping industry. It's global in scope and ever more indispensable in an economy so reliant on international commerce. Not surprisingly, perhaps, there is new evidence out on the open seas that both the bears and bulls can flag to help make their respective cases.
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The Baltic Dry Index is the worldwide benchmark for shipping rates of raw materials, and it has registered some eye-popping gains over the past month. The London-based index registered its 23rd straight daily gain on Wednesday, closing at 4,291, its highest mark since September and the longest streak of gains since July 2006. Daily rates for the largest Capesize ships, which typically carry iron ore, rose 6.8% on Wednesday to $93,197. Just five months ago, daily ship-rental rates were hovering just above $2,000 . . .

As to why the Baltic Dry Index (BDI) works as an indicator, see here:

The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.

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Light. Tunnel. Keep an eye out to see it they can get together.

Shipping Industry Hits Skids

An investment adviser points out that the world-wide shipping industry is taking an economic pounding here:

If the end of 2008 is a predictor of business in 2009, the shipping industry is in for one heck of a nightmare. On June 5, 2008, it cost $233,988 per day to charter a Capsize tanker, the largest ocean-going cargo vessel available for shipping dry bulk commodities. Six months later that same tanker charters for $2,773 per day, down 98.8% in less than half-a-year. To put that in perspective, imagine paying $15.00 for a cab ride home and six months later the same cab driver charges you $0.18. This is a problem shipping companies will continue to face in the coming months as demand for these tankers has fallen off a cliff.

The effect of lower shipping costs has been dramatic, as set out here:

Ocean shipping costs have plunged to 22-year lows, skewing global grain-trading patterns to the point where hog farmers in the United States are importing wheat from Britain and Japan has shunned American corn in favor of supplies from Ukraine.

In some countries, it is now less costly to ship grain thousands of kilometers across the ocean rather than move supplies hundreds of kilometers by barge or railroad cars. But the phenomenon should be short-lived and the United States should remain the world's top exporter of corn, wheat and soybeans, according to specialists in the sector.

"It has opened up opportunities that perhaps wouldn't have been conceivable before and one-off trades may well happen, but it is not really changing the grain flows," said David Doyle, head of wheat at Openfield, a farmers' cooperative in England.

Ocean freight rates reached a record high in May and have since fallen more than 90 percent in a few months to as little as $10 a ton to most destinations.

"Ocean shipping costs are so low that it would be cheaper for south Indian buyers to import Russian wheat than move wheat from north India by train," said one European trader who was not authorized to speak to the news media.
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"Ship owners are giving away bulk carriers at operating costs just to generate cash flow and to pay crews' wages," said another European trader who was also not authorized to speak to the news media. "This will expand the selling range of U.S., Argentine and Australian wheat in the Middle East market if they can compete against the Russians on prices."

The shipping container business is also way down, as reported here:

According to the Transpacific Stabilization Agreement, which represents 15 ocean carriers in the Pacific, Asia to U.S. container cargos dropped 6.9% in the first half of 2008 and could end the year down as much as 8% from last year.

And officials from TSA are not predicting a rebound in cargo demand until the second half of 2009. "Clearly we're in a slowdown right now, but just as clearly, the current freezing up of the global credit system is unsustainable," said TSA chairman Ronald Widdows in a statement. "We expect to see an orderly de-leveraging of the financial markets over the next year that will begin to restore confidence with year-on-year cargo demand growth resuming in late 2009."
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And with demand down, ocean container shipping rates have so dramatically in the past quarter, some shipping lines are reportedly refusing what cargo there is because the going rates are below operating costs—meaning the carrier would lose money by taking the business in certain lanes. Reuters reports that A.P. Moller-Maersk's Maersk Line is removing 7,600 twenty-foot equivalent units (TEU) per week from its Asia-North Europe lanes because, "The current Asia-Europe market is characterized by unsustainable rate levels," according to Maersk officials.

The Maersk move came only days after Neptune Orient Lines said its container shipping business APL will reduce capacity in transpacific trade by around 20% and reduce capacity in Asia-Europe trade by around 25% by suspending certain service offerings.

UPDATE: JOC reports up to 200 container ships could be laid up here:

Over 200 container ships likely will be laid up in the New Year as charter ship owners and ocean carriers adjust to weakening cargo demand, plunging freight and vessel hire rates, and an influx of new ships onto key liner trade routes.

Some 165 container vessels totalling 430,000 TEUs capacity were idle just before Dec. 25, up from 300,000 TEUs two weeks earlier, according to the latest estimates from AXS Alphaliner, the Paris-based consultant.

This represents 3.5 percent of the world fleet in TEUs, equivalent in relative terms, to the laid-up figure during the lowest point of the 2002 slump, AXS says. The list of unemployed tonnage includes six ships of between 7,500 and 10,000 TEUs, and 19 between 5,000 and 7,500 TEUs.
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Charter ship owners have taken the biggest hit from the market slump accounting for 105 of the 165 idled vessels, a figure that’s set to rise sharply in the coming weeks as scores of vessels are due to come off hire with little prospect of re-employment.

If it can find work, a 2,750-TEU sub-Panamax ship will earn around $10,500 a day compared with $19,500 in September and around $30,000 at the beginning of 2008.

Coasties Need Modern Icebreakers for "New" Arctic Realities

The U.S. Coast Guard has two big, new polar ice breakers. Well, they were new about 30 years ago... and the new realities of the push into the newly accessible, potentially rich Arctic (see here) has the Coasties pointing out they need new ice breakers now!

The National Academy of Sciences, the Coast Guard and others have warned over the past several years that the United States’ two 30-year-old heavy icebreakers, the Polar Sea and Polar Star, and one smaller ice-breaking ship devoted mainly to science, the Healy, are grossly inadequate. Also, the Polar Star is out of service.
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Adm. Thad W. Allen, the commandant of the Coast Guard, who toured Alaska’s Arctic shores two weeks ago with the homeland security secretary, Michael Chertoff, said that whatever mix of natural and human factors is causing the ice retreats, the Arctic is clearly opening to commerce — and potential conflict and hazards — like never before.

“All I know is, there is water where it didn’t used to be, and I’m responsible for dealing with that,” Admiral Allen said in a recent interview. Given the 8 or 10 years it would take to build even one icebreaker, he added, “I think we’re at a crisis point on making a decision.”

Ice breakers ain't cheap and need a long lead time, as some of us who were around when the current ships were built recall.

Time to get a move on - Congress needs to put money into the Coast Guard, and the Coast Guard needs to spend it smartly.

Shipping Container Security: Resistance Movement

The politics of container security reported here:

Atlanta-based Home Depot and fellow "big box" chain stores have targeted donations to key lawmakers and stepped up lobbying efforts amid industry resistance to a law mandating 100 percent security scanning for imported cargo.

The new measure - recommended by the commission that examined the Sept. 11, 2001, attacks - requires that every cargo container be scanned for radiation or nuclear hazards before being shipped to the United States.

Business groups, who argue that importers are doing enough to improve cargo security already, are seeking to delay its implementation, which is slated for July of 2012.

"It is not a smart way to conduct cargo security" by checking every container, said Jason Conley, homeland security policy chief for the U.S. Chamber of Commerce. Foreign seaports would have to buy costly scanning equipment and America's trading partners could retaliate against U.S. exports, he said.

At the retail giants, including Wal-Mart, Target, Home Depot, Best Buy and Circuit City, corporate political action committees have focused campaign dollars on Republican members of the Senate Homeland Security Committee, a study of campaign filings by Congressional Quarterly found.

Of the top five Senate recipients of these funds, Sens. Susan Collins of Maine, Norm Coleman of Minnesota, and John Sununu of New Hampshire are all GOP members of the homeland security panel, which could play a crucial role as retailers seek a potential two-year extension of the cargo-scanning deadline.

Maritime security authority Stephen Flynn said he has watched the "energetic" delay tactics with concern.

"The status quo is not sustainable," Flynn said of the current system, under which only a tiny percentage of cargo-that which has been identified as high risk-is scanned for hazards.

No system is fail-safe, said Flynn, a former Coast Guard officer and a member of the Council on Foreign Relations. But he warned that an explosion of a single radiation device in a cargo container would freeze trade worldwide indefinitely unless shippers had a 100 percent scanning system to restore public confidence.

Although industry critics point out that scanning technology is imperfect and prone to false alarms, Flynn said that sending cargo boxes through a portal that combined both radiation detection and image scanning would give inspectors instant and reliable information about suspicious materials. He said the cost would be about $20 per container, which he called reasonable since a typical Wal-Mart container has about $60,000 in merchandise.

The Retail Industry Leaders Association, the trade group for the "big-box" chains, attempted to defeat the 100 percent scanning proposal last year. Spokesman Brian Dodge said that was only one of many issues-including product safety, crime, and tax issues-that have prompted his group to grow and have an expanded presence on Capitol Hill.

Shipping company concerns discussed here. Need for "tamper-proof" containers here, which references a threat scenario:

In a recent piece in Seapower magazine by David W. Munns here. Mr. Munns posits a scenario in which containers passing through Pakistan have had their contents stolen by thieves who un-weld the seams of the metal containers, take the products from inside the container and then re-weld the seams, apparently without breaking the seals on the boxes.

The cost savings of cargo theft reduction ought to help some shippers feel better about an improved container...though it seems to me that a combination of more secure containers, other forms of electronic security and a good random container container checking policy would serve as well as 100% scanning.

Reminder: International supply chains complex

Found here, a reminder:

Outsourcing has created complex supply chains spanning the globe, demanding far closer attention from logistics operators than in the past. This was the consensus of logistics company executives attending the recent Council of Supply Chain Management Professionals (CSCMP) conference in Tianjin.

"Supply chains are often much more complex than we need to see,'' said John Mentzer, professor of Logistics and Supply Chain Management at the University of Tennessee. "In today's world it is common for commodities to be designed in Singapore, made in China, shipped to Hamburg or Los Angeles, and distributed to Europe or North America. Often, garments made in China have to reflect the latest varieties, even for Turkey and India as well, in a matter of days.''

Supply chain management (SCM) represents the future trend, said Guowen Wang, China representative for the US-based CSCMP. He said SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and management activities within and across borders. It also includes co-ordination and collaboration with chain partners.
***
Mentzer said companies face three stages of sophistication in the global supply chain. The first applies to procurement costs. He noted one US company shifted its base from the US to China to cut procurement costs.

The second stage of sophistication is total landing costs, Mentzer said. The same above mentioned US company later moved its manufacturing base from China to Mexico after counting the combined costs for procurement, transportation and inventory, he noted. The move to Mexico was made because of overcapacity and delays at US West Coast ports.

The third stage of sophistication according to Mentzer is identifying supply chain cycles. This refers to six items: Services, products, information, financial resources, demand and forecast.
***
The time element is important too, according to Alan Turley, vice-president of international affairs, Asia Pacific, at FedEx Express. "Today's logistics players do not count the kilometres, we count the time instead,'' he said. Some freight is delivered from Beijing to US within a certain amount of time, in disregard of the distance, he noted. "The target of FedEx is to cut down time and costs,'' he added. The company is investing heavily in the supply chain network to move air cargo from Shanghai to any destination in the world within 48 hours.

And a related warning sounded here:

Mutual marine liability insurer The North of England P&I club claims shipping is at risk of being “overwhelmed by a rising tide of inexperience”. “Unless the industry ploughs more profits from the current boom into recruiting and training new staff, the present adverse claims trend could soon reach critical levels,” says managing director Rodney Eccleston.

“The imminent shortage of experienced seafarers we’ve been forecasting is now a reality,” he says. “There are simply not enough good people out there to run the world’s much bigger fleet properly or to provide the necessary support and experience from ashore.”