The Baltic Dry Index, a composite of the Capesize, Panamax and Supramax Timecharter Averages, hit a one-month low this week, pulled down by weaker demand for Capesize vessels. The shipping index is widely viewed as a proxy for dry bulk shipping stocks as well as a general shipping market barometer.
Baltic Dry Index quote (data via Reuters Eikon)
In August, we first reported that freight data via Goldman identified global trade momentum was slowing since 4Q17, and that July readings suggested an alarming continuation, and in some cases acceleration, of this trend.
The deceleration in shipping rates has closely tracked a tightening in global financial conditions, particularly evident in EM data, which in turn has largely been a manifestation of the ongoing escalation in trade tensions between the US and China.
Now, fresh evidence from Reuters shows the cost of chartering commercial ships has collapsed even further. More specific, rates for container ships have sunk 24% from a multi-year peak while raw material vessel rates have fallen 10% from a five-year high, adding to the mounting evidence that slowing global trade could soon usher in a worldwide recession around 2020.
Container Rates Collapse
At the heart of the supply chain, dry-bulk vessels transport raw materials like grains, coal, ore, and cement while container ships complete the cycle by carrying finished goods from factories to consumers.
Around April, dry-bulk and container rates rocketed to multi-year highs as manufacturers pulled forward consumption to get ahead of the tariffs. The rates peaked in August and started a declined that found a bottom in September/October.
Baltic Exchange Indices Performance
“The flattening out of the Baltic dry index, corroborated by the container index as well, points to a slowing down of the global economy for sure,” Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore, told Reuters.
Frederic Neumann, co-head of Asian Economic Research at HSBC in Hong Kong, said: "global trade is cooling off after a strong run over the last couple of years."
Neumann said demand issues in Europe and China, emerging market stress, as well as trade war escalation, were all significant factors into the slowdown.
He then warned: "their [tariffs] full effect hasn’t kicked in yet."
The Harper Petersen Charter Rate Index, which is published on a weekly basis, tracks rate levels in US Dollars of container ships, had dropped by about 25% from June when it was at a seven-year high to 516 points.
The Freightos Baltic Index, a global container index launched in Singapore in 2017, climbed to a record high in August but has since declined 5.4% to 1,583.
Shipping analysts told Reuters that declining container market rates tend to reflect changes in developed economies while emerging countries more influence bulk shipping markets.
“Now that the trade war is escalating... I have no doubt that this does have a negative impact on containerized trades,” said Ralph Leszczynski, head of research at shipbroker Banchero Costa in Singapore.
Leszczynski said the reversal in dry-bulk rates was partly due to damaging trends in emerging markets, where local currencies in India, Turkey, Brazil, Pakistan, and Indonesia have severely weakened against the US dollar this year, reducing their ability to import.
The most important take away from the report is the idea that developed world economies are slowing. The decline in container rates shows that, and it seems the worst has yet to come. Storm clouds are gathering for 2019, as President Trump's trade war has entered the point of no return, the damage has been done, prepare for a global slowdown.