The Baltic Exchange Capesize Index (BCI) dropped to -133 index points on 4 February 2020, turning negative for the first time ever on 31 January 2020. The composite BDI index (BDI), which has excluded the more stable handysize segment since March 2018, also dropped on 4 February 2020 to settle at 453 index points.
The BCI has been on a freefall through the entirety of December, but the descent started to pick up more steam during the past couple of weeks. A streak of negative developments has been at the root of this downturn, including seasonality, IMO2020, Chinese New Year, flooding in Brazil and the outbreak of the coronavirus.
A market brought to its knees by externalities
The first quarter of the year typically marks the downturn in the Capesize markets, partly due to the Chinese New Year. However, with the recent outbreak of coronavirus in China, large parts of the country have extended the holiday and remained closed to contain the spread.
The shutdown of China is set to negatively affect industrial production and protract the slump of the dry bulk market. If the spread continues at the current pace, it could certainly bring more dire consequences to the Chinese, Asian and global economies than just a slowdown of industrial production.
The virus outbreak comes at a time when the dry bulk market is extraordinarily fragile. IMO2020 has sent fuel oil costs soaring for shipowners. The VLSFO-HSFO spread is currently at USD 233 per MT in Singapore on 4 February 2020. Given the current spread, ships operating without exhaust-gas cleaning systems (scrubber) has seen an uptick of roughly 75% in fuel oil costs. But please note that the BCI index is based on non-scrubber fitted ships, which partly skews the index to the negative side.
One could hope that this is only a temporary index dip below zero, yet for as long as China remains closed, the Capesize segment is bound to remain shackled in the doldrums. One could also wonder what useful information a negative index provides?