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Thread: chart of the week ... ocean cargo ships

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    Default chart of the week ... ocean cargo ships




    The Baltic Dry Index is a measure of shipping costs associated with transoceanic freight. It is arguably a 'leading indicator' of international trade / commerce levels, since the booking of a cargo ship preceeds the delivery and subsequent appearance of foreign goods on store shelves by a couple of months. Price levels are a direct measure of total shipping volume. As you can see, the pricing for transoceanic freight is now at unprecedented low levels.

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    Default Re: chart of the week ... ocean cargo ships

    People are not accepting letters of credit from overseas banks since they're afraid the banks will go broke before they give them their money.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: chart of the week ... ocean cargo ships

    ^^^ actually there are many aspects to this sudden drop in foreign trade levels ...

    - as you point out, lots of foreign sellers are concerned about whether they will actually get paid for the goods they ship

    - foreign sellers are also concerned about how much their goods may devalue in transit, i.e. steel sheets leaving China at a world price of say $US10 only being worth $US7 when they arrive at US steelyards

    - foreign sellers are also concerned about the exchange rate impact in transit i.e. a European machine ordered by a US company last week at a price of $US125k = Euro100k is paid for upon delivery when $US125k=Euro87k

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    Default Re: chart of the week ... ocean cargo ships

    Not just the lower levels, but the % drop from the peak. I'm guessing oil exports/imports aren't counted in this index.
    It would be interesting to see if airfreight between countries has changed, or truck/rail traffic between countries. (EG- is trade between Canada/US/Mexico increasing, while US/Asian/European, etc decreasing during last quarter?

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    Default Re: chart of the week ... ocean cargo ships

    There is another aspect to this.

    Back in the 90's when when Walmart decided that the key to low prices was to get everything made in China for pennies on the dollar part of the calculation that said it was still going to be cheaper that same stuff made in the US was the cost of shipping all that stuff across the pacific in those big container ships. It was a bet made on cheap oil, back then oil was less than 20 dollars a barrel, a gallon of diesel fuel that runs those container ships that they burns thousands of an hour was way less than a dollar, when the cost of that fuel went up by 5-6 times as it peaked at this summer made that once relatively cheap expense of shipping go up to the point that manufacturing in China was not as atractive as it had once been.

    A lot of what you saved by making it there you then had to spend to get it here.

    Some of that manufacturing is now probably going to migrate back to our side of the pacific, probably not the US, but maybe Mexico or central or south america.

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    Default Re: chart of the week ... ocean cargo ships

    ^^^ that's already happening for many manufacturing operations. However, this involves a large new risk a la Hugo Chavez 'nationalizing' foreign owned facilities. Even more extreme is the following from a professional investors' BBS ...

    (snip)"My good buddy just called me and said that the textile factory [ in El Salvador - sic ] he used to be CFO for a couple of years ago just went under today. The nearly 2500 employees are looting the installations taking everything they can and his old boss the President of the factory has already skipped the country. The factory was US owned and it produced for Fruit of the Loom amongst others. "(snip)

    The 'tin foil hat' crowd is of the opinion that when all hell breaks loose in terms of global finances the NAFTA countries of Canada, America and Mexico will basically erect an impenetrable wall along Mexico's southern border. The three countries will then (re)form a 'self contained' economy, with Mexico supplying the low cost manufacturing, with Canada supplying the raw materials, and with America supplying the capital / management / R&D. Part of this scenario also calls for the issuance of a new NAFTA currency, the Amero, ostensibly to eliminate exchange rate fluctuations between the Canadian dollar, the US dollar and the Mexican peso that would otherwise trouble the NAFTA partnership. Of course the 'tin foil hat' crowd would also speculate that there may be far more important reasons for America wanting to dump the US dollar (and with it US dollar denominated foreign debts), but that's a subject for a different thread.


    PS in the way of less speculative evidence, all of the international air freight services i.e. UPS, FedEx, DHL etc. indicate that shipping volumes are way down as well.

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    Default Re: chart of the week ... ocean cargo ships

    Any business with such a massive commodities exposure would have been crazy not to hedge it with futures, so I wouldn't go jumping to conclusions just yet. Or, hey, maybe they really were that stupid
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: chart of the week ... ocean cargo ships

    ^^^ well, under current circumstances, the true hedging of cost versus price risk may not be all that easy. With 'commodity' products like steel sheet, copper pipe, aluminum power cable etc. being imported from Asia, it is possible to hedge the underlying commodity via futures contracts. However, the marginal US market price of those products isn't solely pegged by the commodity component. Additionally, such hedging is not 'free' - it adds cost to those foreign imports in a similar vein to the transoceanic shipping costs which competitors who are located closer to the final marketplace do not have to bear (at least not in the same magnitude).

    And another cost differential is of course the 'carrying cost' ( interest plus currency risk ) of taking an order and buying raw material in month 1 ... manufacturing in Asia in month 2 ... shipping to America in month 3 ... and finally getting paid in month 4. THIS is actually the area where some Asian exporters are now encountering increasing difficulty. A lot can change within 4 months, not only in terms of the financial health of the end customer, but in the financial health of the lender supplying this operational funding, as well as in the relative exchange rate of the buyer's and seller's currencies, even if 4 months worth of potential changes in underlying commodity prices have been hedged. And as the nature of the imported product moves farther and farther up the ladder from being a commodity based product to a manufactured product (i.e. from Chinese aluminum wire to a Chinese aluminum block gasoline engine to a Chinese aluminum case computer, for example), the possible degree of hedging is reduced as well.

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    Default Re: chart of the week ... ocean cargo ships

    Of course you have many more risks than just the raw commodity prices, but I'm just pointing out that saying things like "oil's rising, oil consumers are screwed" (insert your favorite commodity) isn't necessarily correct
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: chart of the week ... ocean cargo ships

    Was talking about the Baltic Dry Index with some of the guys at work today, and I was thinking "I should check up Dollar Den for some links and info... some o them have been following that" but I probably would have got fired
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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