The Baltic Dry Index has an entirely deserved reputation as the kind of rollercoaster ride that can make your heart stop even after fairground attractions begin to pall. But some levels are what journalists pressed for instant comment like to call “psychologically important”. So, what should we make of the news that the BDI is back to a magnitude last seen 13 years ago?
As those who were around at the time will testify, 2008 was a time of tumult that no participant will ever forget. The 4,717 that the BDI clocked in recent days is comparable to September of that far-off year. The key difference is that the trend then was falling sharply, rather than rising as it is now. Just four months previously, the index had stood little shy of 12,000, and rates for capes were topping $200,000 per day.
The newbuilding orderbook went nuts, in what amounted to a bulk carrier arms race. Orders were frequently flipped, sometimes more than once, at ever higher prices. Chief executives of trading houses promised us an endless supercycle, and that rhetoric was often swallowed wholesale, with nary a heed to the famous Mandy Rice-Davies Applies principle. Just months later, the world was looking like a different place, with the subprime mortgage crisis tanking the value of complicated derivatives that were poorly understood even by those who took margins on buying and selling them. Lehman Brothers collapsed and numerous other financial institutions in many countries were deemed too big to fail and had to be bailed out. This was one of the pivotal happenings of the 21st century so far, and instrumental in the chain of events that led to the rise of populist politics. But that’s another story.
Fast forward to 2021, via a decade and more of some of the leanest years the industry has ever experienced. Capes are now making $75,000 per day, which is pleasingly healthy money after an extended period of pain. To top it all, a rising tide is lifting all bulkers; charterers who can’t find a capesize to book settle happily for two panamaxes instead. The trajectory is upwards, reflecting a tight market, low fleet growth and recovering post-pandemic demand, not just from China but the rest of the world too. Congestion has driven rates higher, as ships are tied up for longer due to the coronavirus-related restrictions at ports. In what may be a first for the shipping industry, there is even a commendable degree of orderbook restraint, perhaps on account of decarbonization.
Owners face uncertainty over which technology to opt for and don’t want to be caught out by the first-mover syndrome. And as is always the way when spot rates are high, scrapping rates are low. The bulls out there even think capes will hit $100,000 by the end of the year, especially if China is forced to lift restrictions on Australian coal, if only because of its need for electricity generation. This is some way short of the lunacy of 2008. Even so, the savvier children of dry bulk owners may find it advantageous to go big on their demands to Santa Claus this time round. But the BDI no longer represents all segments. In particular, the handy element — which includes all minor bulks such as cement, steel, and fertilizers — was stripped out of the calculations about three years ago.
Moreover, it is not a given that demand from China will continue unabated. The wobble over the Evergrande bond default seems to have been resolved, without state intervention. Sometimes communists are truer to Schumpeter than capitalists are. Even so, there are longer-term questions about the Chinese economy, which many economists see as overly dependent on a property boom that is palpably slowing, as Beijing rails against the “malicious price-cutting” that has knocked 30% off the price of an apartment in some cities. Nor are high dry bulk rates good news for everyone, of course, not least those in poorer countries, for whom a hike shipment costs mean inflation in the price of staple foodstuffs.
The best advice for shipowners seems to be to make a bit of money while the going is good, but not to get carried away. After all, we are still little more than five years away from the BDI’s historic low of 290 in early 2016. Rollercoasters can be a lot of fun. But most grown-ups tire of them eventually.