Why the BDI always falls in January

Why the BDI always falls in January

Khalid Hashim from Precious Shipping identifies reasons for dry bulk’s annual slump around this time of year.

The million dollar proverbial question on the lips and minds of ship owners, institutional investors and others involved in the maritime business is: Why has the Baltic Dry Index dropped so sharply since the start of the year?

What is happening this year is fairly ‘normal’ since the turn of the century when China became the manufacturing capital, as well as the dominant player in steel production, in the world.

There have been just three years when the BDI did NOT fall from the start of the year figure i.e. in 2002, 2009 and 2013. And the reason for that is fairly simple – the BDI was at almost all time lows i.e. at the very rock bottom, at the start of each of these three years and so there was nowhere for the index to fall to.

There are three reasons that make the BDI fall at the start of each year and then bounce back equally sharply by the end of Q1. These are as follows:

1. China celebrates their New Year towards the end of January or very early February each year. In anticipation of this major holiday which lasts for a week, most major Chinese players in the steel production as well as power generation sectors complete all their purchases of raw materials before the end of the preceding year i.e. during December and then go away for their big annual holidays to be with their families/ancestral homes upcountry without having to worry about their raw material inventory position. They only get back to their work places in the very early part of February when they take stock of their inventory and production schedules. That is when the market starts to bounce back sharply as can be seen from both the charts that have been attached.

2. The second factor is what is known as the ‘January effect’. Most brand new ships that are ready for delivery from the ship yards during the last month of the year i.e. during December, are delayed at the request of the ship owners so that they can get a ship with a ‘2014 stamp’ rather than a ‘2013 stamp’ when the ship would become ‘1 year older’ in just a few days. As a result, the supply side of ships increases more than expected during the first month of the year and adds to the woes being faced by the freight market.

3. Weather is the third factor that has started to make an inordinate impact on the freight market in the early part of the year. For the last few years weather patterns have become unpredictable and unusually harsh. The storms/hurricanes that have beset the main iron ore and coal loading ports in Australia, each year during January, shut down these facilities for quite a few days. This has an immediate impact on the freight market that is already feeling the loss of their main supporters, the Chinese who have gone away for their New Year holidays, with force majeure being declared when the weather becomes particularly nasty. Brazil, the other major supplier of iron ore to China with the highest ton-mile impact, experiences very wet weather during the start of the year and cannot ship out iron ore due to excessive moisture in the cargo. This year Brazil declared force majeure for quite a few shipments due to extremely wet weather and this has added to the woes of the freight market already reeling from the ‘January effect’, and the stormy weather in Australia.

I hope that the above explanation will help in understanding the sharp fall that we have recently experienced in the BDI and the anticipation of the bounce back that usually accompanies these falls a little later in the year in February/March.

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