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A dose of global flu: the male variety?

The world has caught a cold, and not just any cold. The constant flow of negative data the world over could be seen to be exacerbating global sentiment. The ‘bear’ retains its grip on world stock markets as investors shy away from the unpredictable volatility; the banking sector drops from bad to worse as more and more institutions announce further losses. Global manufacturing also continues to bear the brunt of this particularly stubborn virus.

The Symptoms…

The Baltic Dry Index (BDIY:IND), which is often seen as the thermometer of global trade, has plummeted from an all time high of 11,793, last may, to 663 last December, a 22 year low, and has now been hovering around 2,000 for the past couple of weeks. To quantify this dramatic decline; the daily rental rate of the largest bulk carriers dropped from $234,000 last summer to less than $3,000 in early December. Although not wholly indicative of container shipping, the index does illustrate the impact the lack of 11,793, last may, to 663 last December, a 22 year low, and has now been hovering around 2,000 for the past couple of weeks. To quantify this dramatic decline; the daily rental rate of the largest bulk carriers dropped from $234,000 last summer to less than $3,000 in early December. Although not wholly indicative of container shipping, the index does illustrate the impact the lack of demand and tight liquidity in credit markets has had on global trade. After all, if raw material is not being moved, supply chains do not appear to require the necessary materials to manufacture goods.

Similarly, global airfreight which accounts for 35% of the value of goods traded internationally is in freefall; down 22.6% in December 2008 (after 9/11, when much of the global fleet was grounded, the decline was only 13.9%). Of this, Asia Pacific accounts for 45% of international cargo and has subsequently seen the biggest decline in airfreight. Clearly the figures are indicative of a lack of demand and a sign of the economic downturn.

Whilst such economic data is enough to give one a headache, there is a silver lining. A reduction in freight costs is good for the “buyers”, who have been able to reduce shipping costs (both sea and air) but also utilise the spare capacity on planes to reduce lead time and maintain lower stock inventory levels, streamlining their supply chain.

Global commodity prices have generally continued to trend downwards over the past six months due to the lack of demand (see graphics below) Such reductions should certainly have begun to work themselves into supplier inventory by now and we would also expect further operational savings to feed through as vendors try to maintain their existing order books in this tough manufacturing environment.

[GRAPHICS – RUBBER, NYMEX CRUDE, COPPER, ALUMINIUM ]

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