The HARPEX Index is superior to the Baltic Dry Index!

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Like many analysts and economists I have been an avid follower of the Baltic Dry Index (BDI) as a so-called leading indicator of global economic activity. However, I have come to the conclusion that the BDI as such is of no further use to me. The massive growth in demand for commodities from especially China from 2005 to 2008 led to a significant increase in capacity as the number of ships built surged through until the 2010 crisis that resulted in a major change in supply from relatively inelastic to highly elastic. Furthermore, it means that changes in the Baltic Dry Index occur in what is essentially a downtrend or, put differently, in a bear market.

However, I have discovered an indicator that is far superior to the BDI. The HARPEX Index was developed by Harper Petersen, a global leading chartering agent. The Index is calculated by using the actual time charter rates for seven classes of ships. This index therefore measures the rates of moving mostly finished goods globally and is an excellent indicator of global consumer activity. Unfortunately the historical data on the website only date back to 2009. (http://www.harperpetersen.com/harpex/harpexVP.do)

In the graph below I depicted the HARPEX Index against my GDP-weighted Major Economies Manufacturing PMI as well as the Markit Eurozone PMI, with both the PMIs leading by two months. In the graph it is evident that the HARPEX Index should be rated highly as a coinciding indicator in any economic forecasting model. The value of manufacturing PMIs as leading indicator comes to the fore as it is evident that the GDP-weighted manufacturing PMI of the major economies leads the HARPEX Index by two months. The bottoming and subsequent rise of the PMIs in January this year indicated that the HARPEX Index would rise through end March.  It has indeed risen from $376 at the end of February to $393 currently. The slight weakening of the major economies’ PMI in February indicates that freight rates in April are likely to go nowhere and even decline.

Sources: Harper Petersen; CFLP; Li & Fung; Markit; ISM; Plexus Asset Management.

The value of the HARPEX Index can be seen in the following graph. During the great financial crisis in 2008/2009 the HARPEX Index fell to $300 and remained relatively unchanged until February 2010. The global manufacturing sector started to expand in August 2009 when the GDP-weighted Major Economies Manufacturing PMI rose above the 50 level in August 2009. It therefore took six months of global expansion to take up the slack in the container shipping industry. Thereafter the PMI and the HARPEX Index moved in the same direction, with the PMI leading by approximately two months.

Sources: Harper Petersen; CFLP; Li & Fung; Markit; ISM; Plexus Asset Management.

The current level of the HARPEX Index is indicative of how weak the global manufacturing sector really is. This sector is still in a much better shape than in 2009 as the HARPEX Index is still 30% higher than the presumably $300 absolute minimum level at which ships can operate. In my opinion any further strength in the global manufacturing sector is likely to have an immediate impact on global containerized freight rates as the sector is not recovering from a deep recession as it did in 2009.

In a recent article I presented you with a graph of my calculated PMI seasonal factors of the CFLP Manufacturing for China against the Baltic Dry Index, which  not only explained the weakness in the BDI but also the shorter-term movements in the BDI. I argued that January/February would also mean a seasonal low for the Baltic Dry Index and a major reversal would be evident in March and April.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.

The BDI subsequently made a low of 647 on 3 February and is currently at 897. Although the BDI is up 38.6% it is still a far cry from what it should normally have been in light of the usually strong seasonal period. It is therefore an indication of the underlying weakness of China’s manufacturing sector.

Although I argue that changes in the Baltic Dry Index occur in a bear market due to the underlying fundamental factors, the BDI should not be discarded in total as it does give an indication of the underlying strength of China’s manufacturing sector. I regard the HARPEX Index as a better coincident indicator of global economic activity.

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