Summary

Global marine transportation seems to be launching a new Jugler cycle, with the BDI hitting a 13-year high.

The sharp rise in marine transportation prices seems to be closely related to demand:

1) Currently, the global import and export amounts have shown a significantly higher compound annual growth rate in the past two years. By June of this year, this annual growth rate has exceeded 6%;

2) However, shipbuilding is slow, as seen from the known data (container shipping capacity), the annual growth rate of capacity is only about 3%;

The sharp rise in marine transportation prices is not entirely related to demand either:

1) Although the current global import and export amounts/capacity are relatively high, they are not extremely high, at least this data is in line with 2018, and lower than pre-2014 levels;

2) Part of the increase in marine transportation prices may be related to a decrease in marine transportation efficiency - from the reality of port congestion, this bottleneck may occur at the ports, or even be related to port closures leading to port hopping and isolation of some crew and goods.

One supporting evidence is that the data of China's exports to the USA does not correspond to the USA's imports from China.

We suspect that the main reason for the increase in most freight rates is due to port issues. Otherwise, the corresponding freight rates should be at the level of 2014Q2 or 2018Q1. According to this calculation, almost 80% of the current freight rates are caused by port issues.

However, it now seems that the high shipping costs are causing a decrease in global trade demand:

Currently, in terms of China, the throughput of foreign trade goods at its ports has dropped to a historical low point;

Even this contradiction extends outward, as the global freight and railroad freight volume are both declining, and the new export orders PMI for the USA and China are simultaneously decreasing.

This doesn't mean that marine transportation fees will immediately enter a downward trend:

The decrease in demand is only being partially offset by the influence of high stock prices, prices will not decrease just because they were previously too high, one cannot lift oneself up;

From a financial perspective, global potential demand should continue to be relatively strong, after all, global liquidity remains high (short-term weighted interest rates are low).

7. The subsequent marine transportation costs may converge in terms of the rate of increase, or there may be a shift from increase to stabilization. However, it is difficult for marine transportation costs to see a significant decrease in the short term. In this situation, we actually need to be concerned about the gradually increasing export pressure, and even need to pay attention to whether the decrease in export demand will have an unfavorable ripple effect on the global economy in the future.

Main text

1. It seems that global marine transportation is initiating a new Jugra cycle. The Baltic Dry Index (BDI) has reached a new high in the past 13 years.

Since May last year, the Baltic Dry Index (BDI), which reflects the spot freight rates of major global shipping routes for dry bulk commodities, has been rising all the way, recently hitting new highs. It has surged from 398 points on May 13, 2020 to 5650 points on October 7 (with some recent pullback in the past few days), more than 12 times increase, reaching a new high level in 13 years.

2. The sharp rise in marine transportation prices is closely related to demand.

Currently, the global import and export amount has shown a significant increase in the compound annual growth rate over the past two years. By June this year, this annual growth rate has exceeded 6%; however, the speed of shipbuilding is slow. From the known data (container ship capacity), the annualized rate of capacity increase is only around 3%.

3. However, the sharp rise in marine transportation prices is not entirely related to demand.

Currently, although the global import and export amount/capacity is relatively high, it is not extremely high. At least this data is on par with 2018 and lower than the levels before 2014. Part of the increase in marine transportation prices may be related to the decline in maritime efficiency. Looking at the reality of port congestion, this bottleneck may occur at ports, and even be related to port skipping caused by the closure of some ports and the isolation requirements for some crew members and goods.

One piece of evidence is: The data of China's exports to the USA does not match the data of the USA's imports from China. Typically, due to shipping costs, pricing, and other factors, the value of goods imported from China to the USA is higher than those exported from China, but since March last year, the situation has reversed, and in recent months, the gap between the two has been widening. Year-on-year data further highlights this issue, with a significant gap emerging since March last year.

4. Possibly, the main reason is related to ports.

We suspect that the primary reason for most of the increase in shipping costs is related to ports. Otherwise, the corresponding freight costs should be at the levels of 2014Q2 or 2018Q1. Based on this calculation, almost 80% of current freight costs are caused by port-related factors.

5. However, what seems to be happening simultaneously now is: High shipping costs are causing a decline in global trade demand.

Currently, from China's perspective, the throughput of foreign trade goods at its ports has dropped to a historically low level; even this contradiction extends externally, with global cargo rates and railroad freight volumes declining. PMI for new export orders in the USA and China is decreasing simultaneously.

The decline in demand, influenced by high prices, will only narrow the gap to limited potential supply, and prices will not drop because of previously high prices. From a financial perspective, global potential demand should continue to be relatively strong, as global liquidity is still at a high level (short-end weighted interest rates are low). Short-end weighted interest rates lead global manufacturing PMI new orders year-on-year by about 12 to 20 months. Based on the recent downward trend in short-end weighted interest rates (graphically an inverted upward trend), the future global PMI new orders year-on-year are anticipated to continue to strengthen.

It is possible that marine transportation costs may converge in terms of the rate of increase, and there may also be a shift from rising to stabilizing. However, marine transportation costs are unlikely to see a significant decrease in the short term. In this scenario, we actually need to be concerned about the gradual increase in export pressure, and even need to pay attention to whether the decrease in export demand will have an unfavorable ripple effect on the global economy in the long term.

Author of this article: Yang Weixi, Source: To the Bonds Market We Deeply Love (ID: furoyear), Original Title: "The Age of Great Navigation: High Freight Rates Seem to Be Eroding Global Growth"