The Baltic Dry Index bottomed out in February 2016 at an all-time low level, but has since been improving steadily. We argue that these improvements in freight to a large extent is driven by the improvement in the growth rate of global industrial production which also bottomed out in February 2016. The growth in global industrial production, as measured by our Global Industrial Production Growth Proxy (GIPG Proxy), has accelerated in recent months. If the trend continues, it will lay a solid foundation for improvements in freight rates in 2017.
We use the Purchasing Manager’s Index for manufacturing (PMI) as a leading indicator on industrial production growth as the PMI is forward looking in its’ nature in addition to typically being released earlier than the Industrial Production figure for any given month. By weighting each countries PMI with the size of its industrial production we calculate a Global Industrial Production Growth Proxy based on PMI’s from countries representing about 86% of global industrial production. A PMI of more than 50 represents expansion of the manufacturing sector when compared to the previous month. A PMI reading under 50 represents a contraction, and a reading at 50 indicates no change.
The GIPG Proxy was in a steady declining trend between July 2014 and July 2015, but managed to stay in a positive growth territory. In August 2015 the growth turned negative and remained negative until February 2016 where it bottomed out a score of 49.4. Since March the GIPG Proxy has been at or above the 50.0 threshold which separates expansion from contraction and the growth has been accelerating in recent months. The GIPG Proxy for October is at 51.7, the best reading since November 2014.
The most important contributors to production growth
In the below bubble chart we have plotted the PMI of each of the countries included in our GIPG Proxy. The X-axis shows the PMI in October, the Y-axis shows the Year on Year (YoY) change in the PMI, and the size of the bubble represents the relative size of the Industrial production.
The 3 largest industrial production zones are all in positive growth territory and have a higher growth rate than last year. China’s October PMI of 51.2 is up 2.9 points YoY, the U.S. PMI of 51.9 is up 2.5 YoY and the Eurozone’s PMI of 53.5 is up 1.2 YoY. The fourth largest producer Japan, is also in positive growth territory but the growth in slower than last year.
The countries with the strongest growth at the moment are India and the U.K. with PMI’s of more than 54. The countries with the weakest growth are Brazil and Malaysia, both with a PMI lower than 47.
The countries that have improved their growth the most on YoY basis is Taiwan (+6.7 PMI points) and India (+3.7 points). The growth in South Africa has slowed significantly from last year with a 1.6 PMI decline, however the growth remains healthy with a PMI of 52.0. This leaves South Korea (-1.1 points) and Malaysia (-1.6 points) as the worst performers on a YoY basis.
If the Industrial Production growth rate continues to accelerate into 2017 then it will put a solid foundation for a recovery in Dry Bulk freight rates.