The cost of renting a ship has risen slightly over the past few days and, while that might seem irrelevant to people who dig coal for a living, it is actually very good news because it means that trade continues while stock and currency markets burn.
It is going too far to say the excess debt problems of Europe and the US will not spill over into the coal sector, either by reduced demand for electricity or steel, but it is correct to say that there are no signs yet of a slump to match what happened in 2008.
Back then, when the global financial crisis (Mark 1) was in its early days, world trade slowed dramatically, with the simplest measure being a spectacular 94% fall in the Baltic Dry Index, a composite measure of what it costs to hire a ship to carry dry cargo such as coal or iron ore.
On Wednesday this week, as Europe and the US reeled from financial shocks, the BDI rose marginally, mainly because of increased demand for bulk carriers after a typhoon off the Chinese coast forced some of the big Cape-size ships which ply the route between China and Australia to take evasive action.
Whatever the cause of the BDI rising by a miniscule 0.64%, or 8 points to 1265 points, the message is clear – trade has not yet been affected by the typhoon of doubt engulfing financial markets, leading to these questions – why not and will it stay that way?
Before The Hog peers into his crystal ball, a little background on the BDI which takes its name from the Baltic Exchange in the City of London – not far from a spot which once housed the Virginia and Baltic coffee house, a favourite gathering point for ship owners and brokers.
A visit to the exchange today is a sobering affair because it is housed in a fairly non-descript building alongside the famous “gherkin” office tower – which was once the site of the modern Baltic Exchange until it was destroyed by an Irish Republican Army bomb in 1993.
Along the corridors of the current home of the exchange are offices used by most of the world’s big shipping companies which swap notes on ship hire costs, and with staff often meeting in the coffee shop just inside the front door of the building, a cute reminder of how business was done 200 years ago.
Enough shipping history, time for the crystal ball and an attempt to explain what’s happening in the world of commodities, especially “power” commodities such as coal and oil, and why the GFC Mark 2 will be different to Mark 1.
This time around the problem is all about politics, starting with the courageously stupid 2008 decision of governments to take onto their books the debts incurred by failed banks and to now face cost cutting decisions which will inevitably see them voted out of office.
Governments in Europe and the US face these choices: (1) cut spending and get voted out; (2) don’t cut spending, bankrupt the country, and get voted out; or (3) print vast amounts of paper money, triggering an outbreak of rampant inflation, and get voted out.
It is a time in the political and financial cycle when being in power is not worth the pain.
Meanwhile, out in the real world, business chugs along and while it is definitely not a boom it is easy to see global growth ticking over at 3-4%, led by China which might be slowing, but only to an annual growth rate of around 8% as its government orders higher levels of domestic construction and consumption.
Boiled down, trade in basic raw materials will continue to tick over because this time around it is governments which are in trouble and not the private sector, especially the banks, which cunningly offloaded their huge debts in 2008 and ‘09.
That’s why the BDI is holding its ground and why demand for raw materials such as coal will not drop substantially, if at all.
Let the good times roll? Not really, but steady demand is a lot better than another crash.
