Shipping Flashes Early Warning Signals Again

Shipping Flashes Early Warning Signals Again

By Ambrose Evans-Pritchard, Telegraph, UK | 13 July 2009

Port statistics are revealing. They were a leading indicator before the production collapse in the Japan, Europe, and the US over the winter, and they may be telling us something again. Amrita Sen at Barclays Capital says the number of Baltic Dry ships waiting to berth— mostly in China and Australia— has begun to fall after peaking at 154 in mid-June.

The Capesize Iron Ore Port Congestion Index (a new one for me, I must confess) is replicating the pattern seen a year ago just before the commodity boom tipped over. "The anecdotal evidence we are hearing is that vessel queues have been falling. There are reports of cancelled tonnage from China pointing to a slowdown in Chinese buying of coal and iron ore. We are definitely expecting a correction. People have been building stocks of iron ore too quickly in anticipation of the stimulus package in China," she said.

The Baltic Dry Index measuring freight rates jumped 450% in the first half of the year on the China rebound, but has begun to fall back over the last two weeks. (Sen doubts freight rates will recover much since 1000 new ships are hitting the market this year and again next year, compared to 300 in normal years. There is obviously a horrendous shipping glut). Over at Naked Capitalism they are reporting that international port traffic for containers (ie finished goods) is as dire as ever. The rates for 40-foot container from Asia and America’s West have actually fallen this year from $1,400 to $920.

"There has never been a decline like this before," said Neil Drecker from the Drewry Report. "The container industry is looking at a $20-billion black hole of losses. We can expect a lot of casualties". As readers can guess, I remain extremely sceptical of this commodity rally (although it was to be expected as part of the inventory restocking effect). It is not underpinned by real global demand.

It is [mostly] an anti-inflation play by funds betting that quantitative easing by the world’s central banks will lead to systemic currency debasement. That may ultimately happen, but the more immediate threat is the abrupt slowdown/contraction of the broad money supply (M3, adjusted M4) and the collapse in the velocity of money, as well a post-War low in capacity use (68% in the US), and a massive global "output gap".

All the deeper signs suggest to me that action by the Fed, Bank of Japan, Bank of England, and the European Central Bank is still not enough to offset the deflation shock. Though I recognize that this is a deeply unpopular view these days in the blogosphere. Deutsche Bank has told clients to tread carefully. It says the global output gap is -6%, and it is this gap— not the level of economic growth as such— that drives oil prices over the long run. We have in any case seen a $10 dive in oil prices already as the doubts creep in of the global recovery.

Note that Deutsche Bank’s China team says the Chinese economy is "close to the cusp of the second down leg of a forecast `W’ on the back of tightening lending and slowing stimulus spending," according to the bank’s latest report "Still Wary of Global Cyclicals". We are all longing to be bulls again, but we (Mankind, that is, especially the West) have a long hard slog ahead to work off our debt depravities.