Courtesy of ZeroHedge, we have two new signs of slowing global demand, both of which may indicate near-term pressure on Canadian exports and commodity prices.
1) Baltic Dry Index
This is an index I enjoy tracking. Essentially the index tracks worldwide international shipping prices of various bulk cargo carriers. In other words, it is a representation of the change in price you would pay if you wanted to obtain the services of a bulk cargo ship and transport goods across the ocean.
In theory it is a proxy for international trade in general, and commodities in particular. As an example, when China went on its commodity buying spree, the BDI rose as there was more demand for bulk carriers and hence more ability by those companies to charge more.
Here’s a screen shot of the BDI as of today. The index is now quickly approaching 12 month low set in July.
What does this mean? Well, if we look at correlations between the BDI and dry commodity prices we find that there is a relationship between the two:
This coupled with large net speculative long positions in most commodities and with China looking to curb inflation by raising reserve requirements at its banks, it leads me to believe that there may be some price pressure on commodities in the near term.
2) Speed of vessel fleet
In an interesting entry again over at ZeroHedge, they note that the average Chinese cargo ship speed is cratering.
They indicate that this is in response to a collapse in US import demand and suggest that this further validates the notion that the inventory restocking that drove US and Canadian GDP is finally over.
Some of my colleagues who teach in the Marine Navigation program and are former mariners explained to me that when demand dwindles, shipping companies respond by either laying ships up or using more ships but having them travel at slower speeds. Apparently fuel consumption rises exponentially in relation to ship speed, so this is a money-saving tactic employed by these companies to keep their ships moving but at a lower cost.
This graph further calls into question the sustainability of Chinese GDP growth absent massive government construction initiatives. While we all associate China’s economy with strong exports, they actually only represent 5% of GDP in that country. Recall that GDP growth in the People’s Republic is still 60% composed of construction. Speaking of which, the FP ran a story just this week about China’s ghost cities as have been discussed here numerous times.
I see two troubling trends in these data points:
1) Potential future weakness in commodity prices which would weigh on the TSX
2) Weakening demand for imports from the US, which should continue to drag on our exports in Canada. Our current trade deficit is unlikely to return to the black without revitalized demand south of the border.