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.

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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.

Slipping Shipping Portends Bad Economic News

Wondering about the short term future of the economy? Read this by Eric Kulisch and, well, things may not get brighter for you - Freight economics 101 :: www.americanshipper.com:

Most economists have minimized the likelihood that the U.S. or global economies will fall into decline again, but economic data and shipment volumes at freight carriers in recent weeks have raised worries the economy is stalling.
Some of the initial warning signs are coming from a slow-down in business at companies that transport goods. Trucking and other transport modes are leading indicators of economic activity, usually showing upturns or downturns several months ahead of the broader economy.

Some experts suggest weak growth is normal and that the economy and shipments will rebound in the second half of the year. But for the first time since the 2008 financial crisis, the dreaded term “double dip” is being whispered — and it doesn’t refer to the number of scoops at the local ice cream parlor.

Here's a slightly different view 2011 Annual State of Logistics Review: Lack of Recovery Leads to Tightening Trucking Capacity, in which this tight capacity is explained:

Transportation capacity is close to being fully engaged, especially in trucking and air. Though volumes have only recovered around half of what was lost during the recession, total industry capacity is currently much lower than it was in 2007. "The recovery is not being felt evenly throughout the economy and 2010 did little to shore up precarious carriers who have been hanging on hoping to be rescued by a resurgence in the economy," Wilson wrote.

But wait, there's more. Our friend the Baltic Dry Index isn't showing a spurt in shipping rates - a sign that too few goods are chasing too much capacity:

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Is that an "uptick" there at the end? It will need to be the "Mother of All Upticks" to counter the 5 year trend:

That's a 66.24% decrease over the past 5 years.

More here:

Spot market rates on the Europe-Far East trades have been below breakeven levels for all carriers since March. “Still, freight rates have continued to fall and the numerous attempts to raise rates over the past 12 months all failed,” the analysis firm said in a market report.

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If implementation is successful, the increases on August 1 would only bring rates back up to where they were in March. “Thus, some carriers would presumably still operate at a loss, even at those somewhat higher rate levels,” Alphaliner said.

The withdrawal of two Asia-Europe service strings in June and July only removes 3.5 percent of the total trade capacity, insufficient to drive vessel utilization rates above 95 percent.

Further, it is ironic that as shipping as slowed, the costs to the operators have increased:

As the largest part of the transportation sector (78%), trucking remains the hardest hit mode as it struggles to cover costs, particularly rising fuel costs. Though much of the increase has come from fuel surcharges, most truckers have not been able to recover all of their actual added fuel costs.

This shows that even as the number of trucking companies has decreased and the volumes carried by the remaining companies may have increased, the profits of more goods chasing fewer trucks are being eaten by increased costs, especially fuel.

Recovery? Keep an eye on shipping trends. Right now, things are not looking up.

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.