The Baltic Sea Index plummeted more than 40% in half a month. What happened to global trade?

Iron Ore, Investment, Europe, Oil, Funds

The Baltic Dry Bulk Index, which shows the prosperity of the shipping market, has been declining continuously recently. As a leading indicator of the global economy, what does this mean?

The prosperity of the shipping market is closely related to the fluctuation of the world economy. Recently, the Baltic Dry Bulk Index, an important economic indicator of the shipping industry, has seen a unilateral and rapid decline, implying a slowing trend in global economic activities and a continuous deterioration in the trading environment.

The World Trade Organization ( WTO ) lowered its forecast for global trade growth in October last year, expecting the growth rate of global merchandise trade to slow to 3.7% in 2019 ( the previous value was 4% ). Koopman, chief economist of WTO, said that the real risk at present is whether the policy uncertainty caused by trade friction will spread to investment and consumer behavior.

Shipping Index Declines Nearly 60%

Dry bulk commodities are often regarded as leading economic indicators because they often play an important role in core industrial fields such as steelmaking and power generation. Goods such as grain, iron ore and coal, which are generally handled and transported in bulk, are used as primary raw materials, and they are often transported across the sea by ships.

The Baltic Dry Index reflects the changes in spot freight rates of several major routes in the world. Capesize ( Cape Type, Cape of Good Hope Type ), Panamax ( Panama Type ) and Supramax ( Flexible Type ) account for 40%, 30% and 30% respectively. Capesize ships carry more than 100,000 tons, mainly for long-distance transportation of industrial materials such as iron ore and coal. Panamanian ships carry 60,000 to 80,000 tons, mainly for transportation of grain and sugar, and flexible ships carry 50,000 to 60,000 tons, mainly for transportation of phosphate fertilizer, potassium carbonate, cement and other products.

The Baltic Sea Index Declined 43% in Half a Month

From January 18 to February 5, the Baltic Dry Index fell for 13 consecutive days, with an interval drop of nearly 42%. Compared with a four-year high of 1747 in July last year, the cumulative decline was nearly 60%, a two-year low. According to the data of the domestic shipping big data provider billion aquamarines, since the middle of 2018, the major dry bulk cargo speed in the world has also continued to decline. Generally speaking, when the market is booming, ships are sailing at a higher speed, shipowners tend to run faster and faster, and the market is weaker. Considering the cost, shipowners tend to control the speed of ships, and the speed continues to decline, indicating that the overall market is weakening.

The last financial product with a similar extreme trend was crude oil in the fourth quarter of last year, which was also a worry caused by the global economic slowdown. However, OPEC can stabilize oil prices through measures such as production reduction, while international shipping companies can only wait patiently for economic recovery. Another important indicator, the Harper Peterson Index, which measures the trend of global container freight rates, has also dropped 30% in six months.

The Speed of Global Dry Bulk Ships Continues to Decline

Professionals regard the recent transport market price as a response to the obvious global economic downturn. Jeffrey Landsberg, managing director of Commodore Research, a commodity consulting firm, said that the global economy and dry bulk cargo market are showing a very real sign of crisis. ” Generally speaking, dry bulk rates are usually under pressure at the beginning of each year, but the recent decline is extremely rare.”

The International Monetary Fund ( IMF ) lowered its forecast for world economic growth on January 21, causing widespread concern. In its latest Global Economic Outlook report, the IMF lowered its global economic growth forecast for 2019 and 2020 by 0.2 and 0.1 percentage points to 3.5% and 3.6%, respectively. Tight financing environment, trade uncertainty, Britain’s ” hard Brexit” and other risks are all considered by the IMF as triggering factors for the economic downturn. This is also the second time in three months that the IMF has revised its global economic growth forecast.

The global economy is facing great downward pressure.

It should also be pointed out that manufacturing PMI index and industrial output are two important factors that affect the global shipping market. Since the second half of 2018, the two indicators of major economies in the world except the United States are worrying.

Among them, Europe’s manufacturing PMI index in January continued the doldrums at the end of last year. The eurozone manufacturing PMI in January reached an initial value of 50.5, the lowest since November 2014, with the new orders index declining for the fourth consecutive month, with factory production slowing down and corporate demand falling for the first time in more than four years. German manufacturing PMI, the economic locomotive, reported a final value of 49.7 in January, the first time in four years that it fell below the boom-bust line. Among them, the new orders index continued to deteriorate and the growth of employment slowed to its lowest level since December 2016. Italy’s manufacturing PMI index reported 47.8 in January, down 1.5 from the initial value, a new low since May 2013, while France’s manufacturing PMI final value reported 51.2 in January, in line with market expectations.

U.S. and Japan have mixed feelings. The final value of Markit manufacturing PMI in January in the United States was 54.9. The growth rate of new orders rebounded and business confidence improved slightly, reflecting the stronger resilience of the U.S. economy. It is worth mentioning that the Markit manufacturing PMI index in December last year just recorded the largest decline since the financial crisis in October 2008, which once triggered market worries about the U.S. economy. Following the biggest drop in exports in more than two years, Japan’s manufacturing PMI index fell to 50 in January, the lowest since August 2016. The new orders index shrank significantly and the enterprise confidence index fell to a six-year low.

Erik Nielsen, chief economist of Italy’s UniCredit bank, said Europe was now worried and trade frictions had seriously damaged companies’ willingness to invest. According to statistics from Yuxing Bank, the growth rate of global trade has dropped to 2.25%, half of the long-term historical average. Hussein Sayed, FTSE FXTM’s chief market strategist, pointed out that the global economic slowdown, trade frictions between the United States and various economies and the uncertainty of Britain’s Brexit are dragging down business sentiment.

In terms of industrial output data, the European region is also in trouble with a collective decline. Euro’s industrial output fell 3.3% year-on-year in November last year, the first time since 2017. France’s industrial output fell 2.1% year-on-year in November last year, falling for three consecutive months. Britain’s industrial output fell 1.5% year-on-year in November last year, showing a trend of continuous deterioration, while Italy’s fell 2.6% year – on – year. According to data released by the German Federal Statistical Office on January 8, Germany’s industrial output fell 4.7% year-on-year in November last year, the worst performance since 2010, mainly due to the reduction in output of semi-finished products, capital products and consumer goods, and the decrease in construction and energy activities.

Data on industrial output in Europe in December last year will be released one after another from February 7. European Central Bank President Draghi said in the European Parliament last week that the recent economic data in the euro area were weaker than expected, and continued uncertainties, especially those related to trade protectionism, were affecting economic confidence. We are ready to use all policy tools to support Europe’s weak economy, including restarting the bond purchase program QE that was shelved shortly before.

U.S. industrial output rose 4.0% year-on-year in December last year. The growth rate fell for three consecutive months, with a 0.3% month-on-month growth, slightly better than market expectations. Japan’s industrial output fell 1.9% year-on-year and 0.1% month-on-month in December last year. Japan’s Ministry of Economy, Trade and Industry said on January 31 that the weakening market activity in the general and commercial machinery industry, electronic components and equipment industry, and the automobile industry was the main reason. Considering the increase in inventories in 10 of the 12 industries included in the statistics, Japan’s industrial output is expected to show a month-on-month increase from February 2019.

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