Diary of a Financier

Korea Lines Declares Bankruptcy, and Baltic Dry Index is Vindicated

In Economics on Thu 27 Jan 2011 at 10:42
  • As KL declares bankruptcy, I’m vindicated for my BALDRY analysis back in December.

Here’s the news:

Korea Line filed for a court receivership on Tuesday in the wake of losses caused by the global oversupply of bulk vessels and low freight rates.

The shipping line, South Korea’s second-largest bulk-carrying line, suffered losses during the past two years after the shipping was hit by a global economic downturn.

And I’ll let Bruce Krasting break this down for ya:

My friend made the following points on this development:
  • KL owns about 30 ships and manages another 120. As a result of the chapter filing almost all of these ships are coming back onto the spot market. The KL financial status was known by many insiders (bankers/brokers/shippers). This was a contributing factor in the big run off of the Baltic Dry index recently.
  • Spot shipping rates have nowhere to go but down as a result.
  • The Chinese ship construction schedule will bring many new ships into service this year. This will depress rates further. Cargo ship asset values are falling.
  • Some banks will take big losses. Other shipping companies like KL are now on the edge.
  • The dry bulk cargo industry has crossed (once again) from boom to bust.

 This is just one man’s opinion. He happens to own a dozen vessels.

Then, Tyler Durden follows closely behind with a note on the Baltic Dry Index (BALDRY):

The freefall in the BDIY is just ridiculous: following a steep plunge it has now gone in freefall, and is down 3.9% overnight to 1,186. And to all who are claiming that the index is merely indicating a supply glut from the onslaught of new ship arrivals, well the entire orderbook (in progress) has been public and transparent – to claim it is a surprise is about as “naive” as stating that 5 computers and a bunch of NYU kids control the US stock market. As for how much longer it will keep dropping? Well: he post Lehman low was 663.

I have nothing new to add, so I’ll sign off with a reprint of my own December comments:

..if BALDRY was flashing false signals due to an oversupply of vessels, then I don’t read them as “false signals” at all, but rather the realization of excess [inefficient] capacity by upstream suppliers and transporters…

If BALDRY is still suffering from an oversupply, then someone cut loose an outlook for stronger demand than has transpired.

Whenever a 34% drop in BALDRY comes out in the wash, it’s shrunk like your colored cottons, because central banks emerse their output gaps in hot stimulus…  BALDRY will always overreact, and since the Fed subscribes to Keynesianism, SPX will always underreact.  The variables are other nations (ex-US) who have to contend with sustainable debt-loads.  After fighting the 2008-09 crisis, these nations simply can’t afford to apply countercyclical stimulus whenever BALDRY portends doom & gloom.  With “hot money” all the rage & Emerging Markets all the trades, it will be interesting to watch where the BALDRY drop du jour is manifest.

And this little bit from my author’s comments at Seeking Alpha:

Most likely, a shipping company/companies overinvested in ships back in 2006 with the expectation that China’s appetite would indeed be voracious. Instead, China pulled forward a lot of demand in stockpiling hard assets throughout 2008-09. When those ships came online in 2009-10, they forced the BALDRY plummet. But, my point is that someone on the microeconomic level pays for that overinvestment. The shipping companies get their margins squeezed and they miss guidance…

–Romeo

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  1. […] bankruptcy of Korea Lines on January 27 was the first vindication of my […]

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