SERVING THE QUANTITATIVE FINANCE COMMUNITY

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andym
Topic Author
Posts: 805
Joined: July 14th, 2002, 3:00 am

### Freight indices

I'm hoping someone can enlighten me about the massive moves we've seen in freight rates, beyond the 'more buyers than sellers' stuff I read in the papers.For example, the Baltic Dry Freight index (Bloomberg BDIY <index>), which seems to me the most watched, has almost doubled in a month, and now stands at 4x the level of 18 months ago. This volatility is way beyond anything seen in the past (at least for the 10 yrs of data that I can dredge up).Is there a large speculative element in freight? If not, how do we explain a move of this magnitude? And, shouldn't this be a much bigger story than it is? Does anyone have any nos quantifying the feedthrough from freight costs to inflation (at least at the level of PPI?)

jkoul
Posts: 36
Joined: October 7th, 2003, 11:47 am

### Freight indices

Well, I may only partially respond. And it's all opinions of a friend who is active into shipping; we had this talk a few days ago.I sense that the rally in the Baltic Freight Index has mostly to do with the demand from China: Coil, Aluminum, Iron, Steel are in great demand for the industrial and manufacturing boom in the Chinese mainland (Electronics, Automobiles and Clothing production stands at all-time-high). There is not much of speculation going on with the Baltic Freight Index; it mirrors actual supply and demand dynamics and real commercial interest. Of what I'm told, it is the Pacific regions near China that have driven the Index at these levels. In some cases, the cost of hiring a ship to Shanghai exceeds the cost of the merchandise carried ! Shipowners who have their fleet making routes towards (and from) China suggest that what I describe is the sole reason for the Baltic Freight Index to be this high. They feel that these conditions may not be sustainable, but I doubt they can actually evaluate the future growth expansion of the Chinese economy. It all comes down to each individual's opinion on the sustainability of China's growth rates.Sorry not being able to quantify it's influence on PPI and inflation.JKoul

kr
Posts: 1885
Joined: September 27th, 2002, 1:19 pm

### Freight indices

that's what I heard as well... Chinese commodity demand is driving the freight rates

andym
Topic Author
Posts: 805
Joined: July 14th, 2002, 3:00 am

### Freight indices

I guess supply is very inelastic in the short term, but the magnitude of the price move just blows me away (although it seems to be topping out...). I mean, can there really have been such a huge unanticipated surge in Chinese demand recently, or are there some other puzzle pieces missing?

kr
Posts: 1885
Joined: September 27th, 2002, 1:19 pm

### Freight indices

On the supply/demand level I can't figure it out, but at least as far as commodities are concerned, prices have been going up a bit. From where I am it's hard to observe, but when you think about the rate of improvement of living standard for China, this is a huge force. What I read is that China cannot ever achieve a standard of living like Americans have because commodity supply across the board is completely insufficient. Of course, people have been telling a similar story about western oil consumption for a long time now... don't know what ever happened to that. But really, how much steel is required to manufacture even a hundred million cars?

jkoul
Posts: 36
Joined: October 7th, 2003, 11:47 am

### Freight indices

I wouldn't just concentrate on demand from China for domestic consumption only. As long as the Chinese have their own currency pegged at a fixed exchange rate against the USDollar, labor cost will appear minimal to foreign manufacturers who choose China for their production plants. Therefore, China is currently producing goods not only for its domestic demand but also for international needs. I'm not able to quantify such large numbers, but I suppose that after the 1997 Asian crisis (which mostly hurt the local currencies) international investors would prefer the relative stability of China's exchange-rate regime to take their business to.Last year, China was world champion of Foreign Direct Investment -surpassing the USA for the first time- and numbers for the first 9 months of 2003 show that this will probably be the case again this year. (A very rare case of another country ending above the US in foreign investment).I believe the demand for raw material from China is actual, and that it mirrors the 8.5% annual growth rates that the country experiences. (The number is the official growth rate supplied by the government - many analysts say that even this 8.5% is understated).Cotton, copper, platinum, coil and many other commodities' prices are at their highest level ever. So, the reason for the Baltic Freight Index to be sky high is China's demand to cover global (and not only local!) consumption needs.I think this reason is valid and explainable.Now, wether this situation is sustainable or not is probably another subject. Once we explain the conditions that drove the Baltic Freight Index this high, trying to foresee where it will go to next, is partly speculation and partly the ability to analyse global economics.My personal view is that we are experiencing a bubble formation of some sort, which probably has some way to go before it bursts.I presume you may follow China's monthly import numbers to have a fair picture, but then again once you see these going down, the Baltic Freight Index will already have started heading lower.

ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

Rolls-Royce Drone Ships Challenge $375 Billion Industry: Freight what do those who work in freight think about these ? Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Freight indices QuoteOriginally posted by: ppauperRolls-Royce Drone Ships Challenge$375 Billion Industry: Freight what do those who work in freight think about these ?Seems like a pirate's dream come true!I'd wonder about reliability -- I'd think that the crew of a container ship do more than just push buttons and stare at the monitors.

acastaldo
Posts: 1416
Joined: October 11th, 2002, 11:24 pm

QuoteOriginally posted by: ppauper Rolls-Royce Drone Ships Challenge $375 Billion Industry: Freight Reminds me of the book Disturbing The Universe by Freeman Dyson, where the automated ships are able to harvest resources from the ocean and the sub-sea floor, and build more ships (cf. theory of self-reproducing automata), which return to the starting port and unload their goodies for the owner's benefit. Last edited by acastaldo on February 25th, 2014, 11:00 pm, edited 1 time in total. Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Freight indices QuoteOriginally posted by: acastaldoQuoteOriginally posted by: ppauper Rolls-Royce Drone Ships Challenge$375 Billion Industry: Freight Reminds me of the book Disturbing The Universe by Freeman Dyson, where the automated ships are able to harvest resources from the ocean and the sub-sea floor, and build more ships (cf. theory of self-reproducing automata), which return to the starting port and unload their goodies for the owner's benefit.That's a wonderful strategy until a mutation shuts down the "deliver their goodies for the owner's benefit" and the mutants devote 100% of their resources to replicating more mutants.

rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: ppauperRolls-Royce Drone Ships Challenge $375 Billion Industry: Freight what do those who work in freight think about these ?Seems like a pirate's dream come true!I'd wonder about reliability -- I'd think that the crew of a container ship do more than just push buttons and stare at the monitors.I had a brush with this sector many years ago. Then the crew of the supertanker had long maintenance lists to continually work through. The sea is a harsh environment. A lot of nipple greasing if memory serves. Traden4Alpha Posts: 23951 Joined: September 20th, 2002, 8:30 pm ### Freight indices QuoteOriginally posted by: rmaxQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: ppauperRolls-Royce Drone Ships Challenge$375 Billion Industry: Freight what do those who work in freight think about these ?Seems like a pirate's dream come true!I'd wonder about reliability -- I'd think that the crew of a container ship do more than just push buttons and stare at the monitors.I had a brush with this sector many years ago. Then the crew of the supertanker had long maintenance lists to continually work through. The sea is a harsh environment. A lot of nipple greasing if memory serves.Exactly. The daily capital costs of these ships is about 4X the labor costs, so idling a ship in port for maintenance won't be popular. In fact, a drone ship only saves a fraction of the labor costs because even with a drone, there's still going to be maintenance and some oversight labor.

Stale
Posts: 209
Joined: November 7th, 2006, 3:20 pm

### Freight indices

Cool, news of innovation from my home-town!

MHill
Posts: 489
Joined: February 26th, 2010, 11:32 pm

### Freight indices

QuoteOriginally posted by: acastaldoQuoteOriginally posted by: ppauper Rolls-Royce Drone Ships Challenge \$375 Billion Industry: Freight Reminds me of the book Disturbing The Universe by Freeman Dyson, where the automated ships are able to harvest resources from the ocean and the sub-sea floor, and build more ships (cf. theory of self-reproducing automata), which return to the starting port and unload their goodies for the owner's benefit.Is this the same Dyson that dreamed up the bag-less vacuum cleaner?

acastaldo
Posts: 1416
Joined: October 11th, 2002, 11:24 pm

### Freight indices

No relation betweenhttp://en.wikipedia.org/wiki/Freeman_Dyson [Fellow of the Royal Society]andhttp://en.wikipedia.org/wiki/James_Dyson [vacuum cleaner inventor]