The Baltic Dry Index, which tracks the cost of moving bulk commodities and is considered a leading indicator of global trade, is down more than 50% since the start of the year. The Index represents the cost of renting an ocean-going container ship to move goods from, say, Chinese factories to the Port of Los Angeles.
Brokers in Singapore and London said capsize vessels, the largest ships that move bulk commodities like iron ore, coal and aluminum, were chartered in the spot market for as low as $8,200 a day on Thursday, a $500 decline from Wednesday. Break-even costs for carriers can be as high as $15,000 a day, and daily rates in the capsize market hovered above $20,000 last year. The ship executives say the bulk seaborne freight business is suffering from the lowest demand in two years, while China’s trade tussle with the U.S. is making the market more volatile.
There are some specific, possibly temporary things going on here - you may blame weak demand from China over the Lunar New Year and from Brazil after Vale SA’s iron ore disaster, in which a mining dam burst, triggering a flood. And Vale has suspended production at a number of sites, but the void will be largely covered by iron ore shipments out of Australia.
But, as they say on late night TV - wait, there’s more.
China totters precariously as signaled by abrupt slowdowns among its principal suppliers---Japan and South Korea. There are also broader forces at work. The trade war isn’t just a piece of political theatre for the US. They really do need factories to come back home if they want to avoid a populist and/or socialist revolution.
It’s possible that the whole free trade/mobile capital/cheap labor/long supply chain Age of Globalisation, with its assumption of unlimited rich-country demand and plentiful cheap energy for transport was just an artifact of a very specific time.
It was unsustainable to begin with.
Thing is, that the Chinese economy is based on integration with the global system and access to hard currency paying consumer markets of mammoth size. It will only work if it’s possible to bring raw materials and energy from beyond the continent, process them at home, ship the finished product, and the whole long supply chain has no security interruptions anywhere. That is an awfully long list of requirements for a country to function, requirements that China is completely unable to guarantee on it’s own. They need US navy for security, cannot survive in anything different than the current global order.
Which is now changing.
Most important thing to understand about China is the fact that this is not an economic entity, this is a political/military entity and it’s stability is not guaranteed. The maps they showed you at school of one big China? That’s an exception, not the rule.
In the North, the Yellow River is not navigable and the area is wide-open plains with two thousand years of history of civil conflict.
In central China the Yangtze River is navigable and Shanghai is a New York or Toronto of China – this is where the money is. Down south you have sub-tropical mountains covering most of the territory and some good ports down at the Pearl River delta. It took 2000 years for the Chinese from the north to ultimately exert control over south and they see this part of the country as a permanent secessionist problem. Think Hong-Kong.
Between Shanghai and Beijing the deal was this: you have the money, we have the guns, so to make it work they traded off leadership – one is in charge growth and one is in charge of security and unity. Until last March, when the elites made Xi a president for life in China. He now has more power in his hands than any emperor in the history of the country to face global change that is underway.
They say that the only thing in life that never changes is constant change itself. Most people are not comfortable with it. Call it the unbearable lightness of being.
Thing is, I like it that way.