China's June Exports Fall 21.4%y/y in June

Chinese exports continued struggling in June falling 21.4% y/y compared to analysts' estimates of 21.0%, and a 26.4% y/y drop in May. Continued declines in exports are being offset by increased domestic demand, which is heavily bolstered by the country's stimulus package. According to Bloomberg, China's Premier Wen Jiabao believes the foundation for China's economic recovery is not yet set and they will continue on a course of easy monetary policy and pro-active fiscal policy.

A continued decline in Chinese exports is a bad omen for shipping rates. Shipping rates over the last several months have been supported almost exclusively by China's record importation of raw materials. Without a return of global demand for Chinese goods, many of these raw materials are just sitting in inventories one way or another. Thus, it is highly likely that China's demand for raw materials will begin to wain. But, presently it appears Chinese iron imports rose 3.4% in June to 55.3mn tons. However, this could be caused by a lag effect of massive congestion of vessels waiting to unload off the coast of China, or possibly increased imports from India via land. Supporting this view is that one of China's primary ports actually reported a 12% drop in ore imports from the previous month. In either case, I anticipate that this number will fall in the coming months.

The Baltic Dry Index (BDI): Can it tell us anything?

BDI Revisited in new entry written 11/08/2008

Globalization and world trade has become the major growth force in emerging market economies and has significantly influenced developed nations as well. The big question is; how or has the US led slowdown affected this trend. There are of course a series of indicators we can look at to determine the size and value of international trade. But for this analysis we are going to take a look at a less discussed indicator, the Baltic Dry Index.

The BDI is showing a bit of a recovery

What is the Baltic Dry Index (BDI)?
To put it simply, the BDI is a daily index which tracks the shipping costs by sea for various materials including metals, grains, oil, etc...

Why we think it is important?
You can't just build a new cargo ship... When demand for shipping goes up and the supply of boats remains constant prices will go up. Hence we can use the BDI index as a gauge for the demand of shipping and a proxy for the level of international trade. In fact looking back on the data we can see a high correlation between global trade and the BDI. Keep in mind other factors such as oil prices can affect the BDI, but at the same time shipping companies can mitigate these effects by hedging and reducing speeds to conserve fuel.

Most importantly the BDI is a daily index, so we can track demand in the shipping industry in real-time. So if the slowdown is affecting global trade we will see it now not later, and a change in demand for exports could have huge impacts on a lot of economies.

What is the BDI telling us now?
The BDI reached unprecedented levels in 2007, corresponding with the rise in international trade. However, we have recently seen a decline starting in December of 2007, corresponding to the slowdown in the US. The positive news is that it appears the BDI bottomed on Jan. 29th 2008 at 5,615, and is staging a bit of a recovery now at 7,993 verses it high of 11,039 in October. Although it is tough to say how much of this is could be oil related.

Interesting to note is that Canada experienced an 8.5% drop in exports in 4Q07; Canada is the US's largest trading partner. Australia also saw a weakening of exports during the same period.

Conclusion:
We do believe global trade is being affected by the US led slowdown, and that this indicated by the BDI index. The good news is since the BDI is that since it is a daily index we can get a real time idea of what the slowdown could mean to global trade. The bottom line is we think that in this day and age the BDI is an index which should get more attention despite its imperfections.

There is a significant correlation between the qoq change in US (imports +exports) and the BDI...

ADDED LATER:

We wanted to look at the relationship between the BDI and an ETF of natural resources companies, since this industry would make significant use of international freight shipments. However, we could not find a suitable ETF, so we used the equity price of BHP Billiton. The results were not surprising. As expected there was a significant relationship between the stock price and the index. To us this suggests the BDI is heavily influenced by raw commodities exports (which makes sense), and provides an excellent gauge for the global demand of raw commodities.

The BDI has a significant positive relationship with the EQ price of BHP.