Tuesday, 28 July 2009

I'm watching the HARPEX

Not a brand of toilet cleaner, but an index of global containerised freight. Those looking for green shoots in the global economy are wriggling with repressed excitement at the recent upturn in the Baltic Dry Index - measuring international shipping costs. As the BDI is often described as a 'leading' indicator, it's offered as evidence that global manufacturers are re-stocking on material inventories. However, the BDI is highly volatile, and dependent on the available shipping capacity as well as demand. If there are 50 ships and only enough bulk cargoes to fill 49 of them, shipping rates can fall by 20%. If 51 cargoes are competing for the same ships, rates can rise 20%. So a 4% change in demand can cause a 40% change in shipping costs. These wild swings mean that the BDI is typically graphed on a log scale.

The BDI typically measures bulk cargoes - ore, crude oil, coal, grain. HARPEX typically measures finished goods - the containers of LCD screens from Taiwan, Scotch Whisky from the UK, motorcycles from Italy and so on. And on my reckoning, it's a good indicator of global consumer activity and value-added conversion activity - which for a consumer-driven and high value-added conversion economy such as ours is surely the critical indicator. As you can see below, it's flat. And it's not a log scale.

City-types and economists please feel free to disagree ....


Nick Drew said...

your Micawberish 49 / 50 / 51 logic can also be read the other way: one extra vessel can have a big effect, independently of the amount of underlying trade

and new ships come off the blocks many months after construction has been commenced; they sail blithely into whatever economic conditions prevail when they are launched, even though ordered in different times

this lay behind my prediction for 2008 of collapsing freight rates: I knew that there were huge numbers of ships destined to come down the slipway in 2008, which was fairly obviously going to be a thin year for trade, if not actually catastrophic

the extra detail was that the global fleet extant on 1 Jan 2008 was relatively new itself, i.e. there weren't many obvious candidates for taking out of service, but rather a huge number of (partially) already depreciated, fairly modern vessels

the operating economics of which are based on (if one may use the phrase) sunk costs

Nick von Mises said...

Energy usage in the exporting economies is another good signal. Electricity use is way down in china, suggesting the factories aren't humming.

Here's a summary with good charts on the collapse of world trade


Raedwald said...

Nick D - yes, so the recent rise in the Baltic index could equally well be down to ships coming out of commission and not being replaced, rather than to an underlying increase in volume carried?

Nick Drew said...

yes - belatedly the Fal Estuary is chocka !

but it's taken a while - they were just chasing the rates downward for months and months: marginal opcost (for a while) is just bunkering

new vessels were being completed all through '08 but that's pretty much stopped now