A "Perfect Storm Is Coming" Deutsche Warns As Baltic Dry Falls To New Record Low
Following disappointing China PMI data and a collapse in US ISM Manufacturing imports data, the fact that The Baltic Dry Index has collapsed to fresh record lows will hardly be a surprise to many. However,as Deutsche Bank warns, a "perfect storm" is brewing in the dry bulk industry, as year-end improvements in rates failed to materialize, which indicates a looming surge in bankruptcies.
At 468, The Baltic Dry Index is now at a new record low...
And US Manufacturing imports suggest things are getting worse, not better...
Which leads Deutsche Bank to warn of...A Perfect Storm Brewing
The improvement in dry bulk rates we expected into year-end has not materialized. And based on conversations we've had with several industry contacts, we believe a number of dry bulk companies are contemplating asset sales to raise liquidity, lower daily cash burn, and reduce capital commitments. The glut of "for sale" tonnage has negative implications for asset and equity values. More critically, it can easily lead to breaches in loan-to-value covenants at many dry bulk companies, shortening the cash runway and likely necessitating additional dilutive actions.
Dry bulk companies generally have enough cash for the next 1yr or so, but most are not well positioned for another leg down in asset values
The majority of publically listed dry bulk companies have already taken painful measures to adapt to the market- some have filed Chapter 11, others have issued equity at deep discounts, and most have tried to delay/defer/cancel newbuilding deliveries.
The additional cushion, however, is likely not enough if asset values take another leg down; especially given the majority of publically listed dry bulk companies are already near max allowable LTV levels.
The move to sell assets in unison can lead to a downward spiral, where the decline in values leads to an immediate need for additional equity to cure LTV breaches.
Source: Deustche Bank
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A shipping broker made me fall off my chair the other night when he told me that he closed a deal for transporting iron ore from Western Ausralia to China for $2.90 a tonne.
We are all Lieutenant Dan now!
In a world where it is cheaper to harvest a log in North America, load it onto a truck and drive it to a port, put it on a ship and sail it to China, put it on a barge up the Yangtze River, then onto a truck to drive it to a factory. Then reduce it to clothes pins, pack them in boxes, put them on trucks, truck them down to a barge on the Yangtze, sail it down to a main port. Load the boexes into containers, load containers onto a ship, sail to Long Beach and unload the containers. Take out the boxes load them on trucks, drive them to the town where the logger who cut the tree needs to hang his laundry out. He goes into WalMart and buys it an an everyday low price. As long as that is cheapest, fastest, most profitable, they will keep doing it.
As a 40 year veteran logistics specialist, I salute Jack Burton's pointed & poignant summation.
And, yes, “They will keep doing it.”
Nice comment, Jack. Ya know I lived in Michigan in the heyday of the big car manufacturers there. We tend to denigrate "line" work because we've become too sophisticated a country for that kind of plebian job, or so were told (jobs Americans won't do). But the guys I knew who worked those lines were incredibly proud of being part of the great American car creation companies. They had a sense of pride in their work and in what they created. People need that to hold their heads up.
So, the previous mantra that proposed the BDI rates were lowering due to newer and more efficient ships being brought online no longer plays out?
With the price collapse in bulk commodities also making headlines, it sure is getting harder to hide the fact that globally, production has really hit the wall.
Looking at the chart, ISM Manufacturing Imports were always in recession before hitting the lows seen today. Conclusion....we've been in recession, are in recession and the slack jaw manipulators are not allowing anyone or anything to admit it.
OK, so have a chuckle, but I have never become comfortable with the "chinese" prices of things. Sometimes I tell my kids that it baffles me to pay the same prices for thing (that were available) now that I saw my mother pay when I was a kid. We are a resilent people and we'll find a way to crank this one over and gear up manufacturing in this country. My kids are workers because that's what they've seen from me, so no worries there. The worry is the generational welfare families who have no clue how to do anything, even simple things like cooking from scratch or using a sewing machine.
And regarding those guns Obomao wants to take, he can kiss the grits of this country. The guy is such a liberal twit that he has no clue, no idea. They'd have to come up with a new word because "revolution" would be way too mild.