Is the global economy back on an even keel?

Day rates for the movement of goods around the world hit their peak in early 2008, a few months before the global financial crisis. Which direction are these same prices heading in now, and can the shipping industry help predict the direction of the global economy?

Khalifa Industrial Zone Abu Dhabi, which is being constructed between Abu Dhabi and Dubai, is one of the largest infrastructure projects in the world.

Forty-two floors up, from the window of Mercator's meeting room, Singapore stretches out, a landscape of order, dotted with trees and water. To the south, a haze of humidity hangs on the horizon, reducing the Indonesian islands to no more than an outline. Ships, trawlers and tankers sit between these two points, like toys in a bath, motionless in their motion. These are some of the world's busiest shipping lanes, the blue of the ocean endlessly crossed by small black lines, keeping the economy of the world moving.
In the meeting room far above the sea, K Srivastava, a vice president of Mercator in Singapore, is explaining why the company he works for adopted a cautious approach during the heady days of the first half of 2008.
"We could see the cracks," he says, "We could see the cracks very visibly because the day rates were so high. That on a long-term basis with that kind of day rates, one wonders whether any business can be sustainable."
Mercator is one of the world's leading dry bulk shipping companies, a company that moves vast quantities of dry goods - grains, coal, iron ore - around the world, servicing the factories and industries that keep the global economy moving.
Back in 2008, in the months before the financial markets collapsed, the per-day price for moving a shipment was vast. Companies such as Mercator were making huge profits. By one estimate, the shipping industry made an estimated US$80 billion (Dh294bn) in profits in 2004. But something didn't quite add up.
"We found the day rates were too high, [too] unrealistic. The day rates were about $80,000 (Dh294,000) to $100,000 in the peak of times. So everybody who has a ship was earning $100,000 per day. Now that has a couple of implications. Operating costs for a ship are typically in the range of $5,000 per day. If you were to say you are earning $100,000 and operating costs are $5,000 ... it's still a lot of money. And therefore something had to be bizarre there."
Mercator's reaction to this situation was to hold fast, not taking on loans or debts. The day rates, notes Srivastava, were at their highest level for a decade. Other indexes were also high, at record levels. The Baltic Dry Index (BDI), a measure of the daily average cost to ship dry bulk commodities, was at record levels.
"If you looked at the BDI, it went from a five-digit number then it came to a three-digit number," says Srivastava. "When you have volatility as much as that, you have to be really careful how you run the company."
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What happens on the high seas affects everyone. Analysts watch global shipping closely because it can predict the direction of the world economy. Around 90 per cent of all the world's goods are transported by sea, meaning that when economic activity is strong, the shipping industry is buoyant. Raw materials need to be transported around the world and finished products need to be shipped to their final destinations.
At the same time, shipping can provide a sense of where the global economy is going, especially in an uncertain time. But it doesn't always predict the future very clearly.
In general, there are two main types of traffic that analysts look at: the shipping of bulk dry commodities - such as coal or grain - and container shipping, completed products ready for sale.
The usual measure of bulk shipping is the BDI, a measure of the daily average cost to ship bulk dry commodities. As the index moves in response to demand, it can provide an accurate reading of current global demand for raw materials.
It can also provide a look into the future. The raw materials transported usually take between six to nine months to be made into the end products and shipped to customers. The BDI can therefore offer an insight into what demand there will probably be for these products in the future.
Typically, companies will order raw materials in advance of when they expect their products to be needed, and in sufficient quantities. So the BDI is what is known as a "leading indicator" of economic activity. An increase in the BDI can signal an anticipated increase in global demand several months down the line. A decrease can indicate that demand is expected to drop, as companies cancel or don't place orders for raw materials.
Container shipping, on the other hand, is a "lagging indicator" of economic health because orders are placed six months ahead of when they are delivered. The container rates today reflect the outlook of businesses six months in the past, who will have placed orders for goods that are now ready to be shipped.
The high that Srivastava in Singapore was discussing came in the summer of 2008, when the global economy seemed to be riding high. Other indicators of global economic health - such as house prices - were strong and financial markets around the world were booming.
A look at the BDI gives a sense of the direction of the world economy. The BDI reached a high of about 11,800 points in May 2008, it's highest level for years. Having been on the rise for many months, and with no particular shocks expected, it would have been easy to predict the BDI would continue to rise. But it didn't. From May 2008, it began to plummet spectacularly, dropping rapidly all through the second half of 2008, to reach a low of 666 in December of that year. From then its progress upwards has been erratic, climbing to 4,000 in summer 2009 before dropping back to 2,000 the following September, climbing again to around the 4,000 mark in May 2010, before dropping to 1,700 two months later.
At the start of this year it dropped to just over 1,000, and now remains at about the 1,500 mark.
What does all of this mean? If the BDI is so low, is the world economy going to remain stagnant for the rest of this year?
The answer is: perhaps. An explanation of why goes to the heart of how difficult it is to make predictions from one index only.
At the start of this year, two natural disasters occurred that had a significant effect on shipping rates: the flooding that affected Australia and the Japanese earthquake and tsunami conspired to create a significant knock-on effect for bulk shipping across the world. Flooding in Australia's mines meant millions of tonnes of iron ore remained unprocessed, while the Japanese tsunami disrupted the ability of ships to enter certain ports. As one analyst told this newspaper: "The exceptionally weak day rates in the dry bulk shipping market in the first quarter of 2011 were due to weather disruptions around the globe."
The other problem is excess capacity. In the period directly before the global downturn, orders were placed by global shippers for new vessels.
Since it takes about two years for ships to be built, many of these vessels are now coming online, creating excess capacity in the system and dropping prices.
This is the chief problem with a measure like the BDI. Although it can predict the general trajectory, it can only do so when seen from a wide perspective. In between the trajectory are too many dips and falls, too many brief peaks, too many other factors. But since shipping does track the global economy closely, perhaps adding another measure will clear up the closer details.
Hamburg is a city of merchants, a place where you can feel the beating heart of Europe's economic powerhouse. One way to gauge the volume of container shipping, of the level of completed products being transported for sale, is to look at Hamburg. More than half of all the container vessels in the world are operated from Germany; if the volume and price drops, that means fewer goods are being transported to be sold, fewer sales are made and economies stagnate. If the BDI provides the big picture, perhaps container shipping will fill in the details.
The Hamburg Shipbrokers' Association publishes an index that follows the prices charged by container ships. The statistics are based on a database of 20 to 30 freight brokers based in Hamburg, with the figures broken down by the type of ship, its capacity and the time for which the ship is chartered. Unsurprisingly, the statistics are complicated, providing detailed information for companies. But the broad thrust of the index is clear: prices rose every year from 1999 (when the index began), reaching a peak in 2005 and continuing relatively high until 2009, when prices crashed. Since then, prices have risen slightly but are still far below the highs of the middle of the last decade, more equivalent to prices at the start of the millennium. Prices are offered in TEU (Twenty-foot Equivalent Unit), the industry term for one container, the colourful standard-size metal boxes that are so familiar on docks and loaded lorries around the world.
For example, the cost of shipping around 300 TEU on a journey of two months or more was $16.70 per TEU per day in 1999. By 2003 that had risen to $19.57, jumped in 2005 to a high of $31.71 and remained around $26 from 2006 to 2008. In 2009, as the global downturn took hold, it plunged to $12.45, dropped fractionally the following year to $12.42, before climbing to an average of $14.79 for the first five months of this year. In May 2011, the price was $15.72 - a climb from the lows of 2009, but still half of its 2005 peak and almost exactly the same price of a decade ago, in 2001.
Such costs are particular and only illustrative of the situation, but the prices for other variations of container shipping follow the same trajectory.
What do such statistics tell us? They give a part of the economic story, and fortunately a different part to the BDI.
Container shipping is broadly focused in one geographical direction. While an increase in the BDI tends to mean that dry bulk commodities are increasing in demand, such demand is usually located in developing nations, in particular China and India. Hence the traffic flow is usually eastwards, to China and South-east Asia.
Container shipping works in the opposite direction. The finished products are mainly destined for markets in the developed nations of western Europe and North America.
What such statistics suggest, therefore, is that demand for products in the developed world is gradually increasing, but is still below the peak demands of the last decade.
Abhishek Tandon, a consultant and research manager in the New Delhi office of Drewry, a shipping consultancy, says that although container shipping grew last year, this year may be more modest.
"The container business as measured by global port throughput grew by almost 15 per cent in 2010. However, the growth rate is expected to taper down in 2011-12 and we expect that it might not be a double-digit growth and the figure could hover around eight per cent or nine per cent."
Tandon cites four reasons for this: first, the high growth rate of last year was really a result of the low starting base in 2009, directly following the global downturn. The European debt crisis also affected traffic, as did the natural disasters - the Japanese earthquake and tsunami, the Australian floods - that also affected dry bulk shipping. Tandon also notes that "continued inflationary pressure and high interest rates are also curbing demand globally".
Tandon is optimistic that the global economy has recovered, but says growth levels may not return to their previous high rates. There might be a "new" normal.
"The demand slumped in 2008/09 as money was sucked out of the system," he says. "The global economy seems to have come out of that deep recession and international trade seems to have recovered. However, the new normal growth might be different - lower - compared to normal growth perceived before that period."
In that detail is the sting of the tale. The detail of the numbers is encouraging: at first, in 2009, the price of container shipping dropped, meaning that companies were expecting smaller demand and thus placing smaller orders. Yet the world economy is growing steadily, albeit slowly. Unlike the erratic movements of the BDI, the prices for containers have climbed steadily. The world economy is therefore growing again, but only slowly.
But the sting is that the heady prices of 2008 were probably an anomaly. As Srivastava said in Singapore: something didn't add up. In the future, those highs may come to be seen as peaks rather than plateaus. The world economy may have to prepare for a new normal.
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Prediction is a messy business, and staking money on the statistics of the past is risky. For a man who is managing a multi-billion investment based on such a strategy, Tony Douglas is remarkably calm. "We'll be able to see the Louvre from this window," he says, half turning in his seat and peering across at the wide empty water beyond. From where Douglas sits, there is no normal.
Douglas is the chief executive of the Abu Dhabi Ports Co, a government-owned company that is building one of the largest infrastructure projects in the region. "You really need to see it," is how it is first described to me and I am ushered to what looks like an iPad the size of a large dining table. On the screen materialises Kizad, a new industrial zone being constructed between Abu Dhabi and Dubai.
Kizad (Khalifa Industrial Zone Abu Dhabi) is really an industrial zone with a port attached. The new Khalifa port in Abu Dhabi, which opens next year, is an extraordinary construction project, totally reclaimed from the sea, the size of 340 football pitches. And yet it is dwarfed by Kizad, to which it will be attached, an industrial zone that will be 417 sq km when completed, or two-thirds the size of Singapore itself.
Kizad is the outcome of that prediction, that the UAE's geographic position will place it squarely in the middle of the producing zone to the east and the consumption zone of the west and that, with a new port complex in place, the UAE will reap those rewards.
Douglas is convinced it will pay off. "From 2004 to 2008 container volumes within the region were increasing by about 12 per cent, as an averaged out number. Obviously 2009 [was] flat, that's when the markets went down, 2010 recovering, we're up by 18 per cent this year, up to now."
With that kind of growth, a new, larger port would rapidly be required. With an industrial zone the size of Kizad in the offing, it becomes essential.
"Even without Kizad, which becomes a destination in its own right, the underlying requirement for Abu Dhabi, given all of the other activities that are going on, still obviously needs a world-class port in order to be able to cater. When you put the two together, the underlying requirement and Kizad, it's the reason you end up with a super-port."
What Kizad shows is that even if predicting the future using current barometers were possible, that doesn't tell you where to go. A project on the scale of Kizad would never get started if its architects waited for signals from the markets. Instead of looking for a road map, they have set about building the road.
Douglas himself sounds a note of caution about using any one measure, such as container shipping or dry bulk shipping, to predict global economic activity. "If you'd said any one single thing, whatever you'd have picked, I'd have said no. Because I've realised ... unless you're looking at a blend or a basket of things, one barometer that says you're going up might allow you to be distracted from the six or seven other things that are saying you're on a collision course."
He points out that those who looked at the numbers for global shipping in 2008 would have predicted "on that basis, the land of milk and honey". Spending too long reading lines in the sand can lead eventually to the edge of the cliff.
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The ships that cross the Singapore Strait on their way east take a relatively straight path across the South China Sea and on to the ports of China and Japan. Those that go west navigate up between Malaysia and Indonesia through the Malacca Strait, before curving up to India or through the Red Sea on their way to Europe.
In a sense, predicting the world economy through shipping is a bit like that - it can give you a sense of the final destination, but not the twists and turns that might occur before you get there.
Faisal al Yafai is a columnist for The National.