The HARPEX Index is superior to the Baltic Dry Index!

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.