Wednesday, January 13, 2016

Rail versus the baltic dry index

Wesley Bruce

Gary North a leading Austrian school economist and historian talked about the Baltic dry index tanking. It has fallen badly indicating that an economic disaster is happening, we are sliding into a depression.
Note: the BDI is USD hire paid per day for the four bulk cargo classes and it's down to $402. It's a very bad sign. It's not $ per ton. If people stop buying bulk cargo they have stopped producing at at the scale we have seen in the past.
As I write it looks like the stock market has caught on and, on pretty obvious Chinese numbers that everyone should have expected, the stock markets crashed.

It's even worse because the HARPEX index of containerized freight has virtually sailed off the edge of the earth. It's fallen to 363 TEU 1 TEU is based on the volume of a 20-foot-long (6.1 m) intermodal container going by sea per day. A 45 foot container is 2 TEU. Only 14% of all container shipping is included in Harpex but it is representative.

While this is bad it may be a little worse. Neither may fully recover, ever. They may become obsolete indicators.

Rail heads.
My brother is a rail fan, not a train spotter but someone that is into studying the technology of the tracks and someone that is looking where you would or could put new commuter and freight lines. Over Christmas he showed us a dozen youtube videos of the latest track laying systems. (yep my family is that weird) Our grandfather was a railway man. In his day it took 20 - 30 men and several weeks to lay a 100 miles of track. Today it takes half as many men and a quarter the time. Today it's definitely skilled labor not unskilled labor. This caught my eye:

All the heavy lifting is machines and there is a machine for every job.
And this one.
Its a track renewal system that literally replaces the rails under itself. The train is riding on rails that it itself is carrying off the ground!

Here are the details of how a new track is laid.

And this one is the biggest track layer in the world, at the moment.
But this one is already 5 years old.
There are hundreds of these machines. All slightly different. There are only a few hundred needed. Lay a hundred miles of tracks and it's there for decades.

A question occurred to me.
Could the growth of rail impact on shipping and lead to both the Baltic dry index and the HARPEX being reduced by rail competition? Could it start giving wrong numbers eventually over time? There is no equivalent index for global rail tonnage or rail container tonnage. Or at least not one that shows up on google. Everyone uses differing calculations making tonnage comparisons between rail and shipping difficult.

The cold war cut Eurasia in half. With little or no western cargo going through the Soviet Union. While the transiberia railway exists it took most of the Soviet Union's 70 years to finish what the Tzar had started. It also dives far to the north away from China at key locations. Partly to link with river based traffic in Siberia and partly to avoid being cut in a possible Chinese invasion of disputed regions. As soon as the iron curtain fell railway engineers were looking at recycling the steel into railway tracks across the continent from China to Europe. They are succeeding.

There are some huge rail projects out there. China and Europe are now linked by several thousand miles of track through Kazakhstan.

While the UN is the lead organization on such projects the people involved are rail fanatics that have little time for bureaucrats, a hundred Dagny Taggarts (The pretty railway engineer/ Tycoon in Atlas Shrugged).
The rail trip takes half the time, half the crew, is considered safer. The tonnage is small but will rise fast.
There's a slightly older track too
Wikipedia has Usage data on it.

From January to November, 2012, a total of 40 freight trains ran on the Yuxinou Railway, transporting 1747 containers with 21,000 tons cargo, and worth of 1.15billion USD. The freight included 3.062 million laptops and 564,000 liquid crystal display screens.
(Note these numbers are from 2012 when the track was laid but not all the infrastructure finished. 21000 tons on an unfinished line!)

The first direct China to Spain freight run arrived December 2014.

It's fascinating how the various sites talking about this project never discuss how its funded. It's a mix of Public-Private Partnerships (PPPs), western aid money, international loans and inflated currencies.
[From the UN department for vague statements.]

The problem of how to fund a large rail project goes back to well before Ayn Rand's Atlas Shrugged. Ideally it should be private bonds and shares issued by the railways companies paid for by per-tonnage mile fees on the rolling stock. It's likely that the PPPs will be doing this. Technically this makes it no different to every other railway project since the first in the 17th century. Going bankrupt in the process is also a tradition but the rails once built roll on.

Shipping may be cheaper in a world where trade is from one major port to another major port but shipping has three problems.
Often the cargo must be handled several times. Mine or factory to port, port loading, then port to final destination. In many cases once you have it on a truck or train it's easier to turn around and go direct over land. Forget the bottle neck at port and it's hassles, red tape and potential pilfering. When containerization came to Australia our coastal shipping industry just died. Bottlenecks, particularly unionized bottlenecks are bad for business. Only island nations absolutely need to send everything through ports. This is the key behind the Eurasian land bridge idea.

Secondly many see the middle east and the red sea as a potential choke point. A high risk of trade routes being cut by war and piracy. The Somali piracy drove many more people to consider the Eurasian land bridge idea and the trans-Asian railway as an alternative. Note: In some cases this was less about piracy than about American fleets checking shipping for cargo's going to Iran and other dangerous states. An overland route suits some that are prone to get in the US navies sights. Sometimes I think the US navies reasons are good so the rail may pose a long term risk. A nuke on a train is much easier than a nuclear missile or even a nuclear bomb on a boat. A few more neutron detectors near the track will be needed. A Nuke on a container truck trumps all.

Lastly as cell phones open up a million young entrepreneurs in a thousand villages to the wider world of commerce and capitalism, global trade routes will become less about big city to big city and much more about point to point trade in smaller lots. A fish net not a fishing line.
This favor's containers on land routes, and big ships don't do small lots well. Village A in Tajikistan trading it's beef to village B in China. Tajikistan and Kazakhstan has several million head of livestock that never make it to market. Now that there are railheads and spur lines with stock loading facilities (built by Australian and US companies) that massive stock of beef, goat and lamb will reach the world market but very few ports. The geological resources in some parts of central Asia have been barely prospected. There are area's that could rival the US wheat belt undeveloped.

There are however changes in containerization too. Normally bulk cargo is raw materials and containerized cargo is finished goods. When modern inter-modal containerization was first invented by Malcom McLean it was envisioned as moving bulk cargo as well but loading bulk cargo onto normal containers was tricky. Special top hatch equipped hopper containers never filled fully, were hard to clean and were a death trap to anyone in side if miss handled.

However it can now be done thanks to two innovations: Container Liner bags from various companies and a New Zealand company, Ward that came up with several container loaders.
Here is one in action.
These load and unload containers by standing them on end or tipping them carefully up at an angle. There machines are a masterpiece of steel and hydrolics. They are selling very well around the world. Here is the unloader. There are more videos on the site. Check out the horizontal loader. It works like a giant hypodermic full of junk.
New Zealand is a small country so small lots matter. Getting a boatload of sugar delivered to their chocolate factory makes no sense. As the world develops and decentralizes there will be more small countries.

As this technology rolls out more widely more bulk raw materials will be moving by container confusing anyone using the Baltic dry index and the HARPEX. This technology allows raw materials to go out and finished goods to come in, or vise verse with the one container. No more shipping empty containers halfway around the world passing an empty bulk freighter going the other way. It completes containerization. It also suits the future village to village decentralization of global trade. It will take decades to become significant and there is a need to simplify and automate the installation of container liners.

Equivalent global rail index needed.
The Baltic dry index and the Harpex are both only shipping. There is no equivalent global rail index yet. There are national indexes. This is the USA.
The drop after Christmas is normal and the precipitous drop in the shipping indexes are not matched on the monthly index of US rail traffic. It's too early to see last years results but spot the GFC on the Annual table, you can but it's not as sharp a drop. Rail is cheap, in a crash cheap wins. This will not diminish the bust Gary North is talking about in the top link. It does not invalidate his point. I'm talking longer term.

Many of these routes run through Russia. While there are problems political problems between the west and Russia that should pass. Russia will not close these trade routes once they are created. It's an income source and a matter of prestige. There is also a southern route being built through the stans and Iran, Turkey, to Europe. Even major wars do not stop or destroy railways for long. After WW2 the railways were rebuilt within months and at Hiroshima it took only days. The Soviet Union did not stop rail trade it simply botched the process of building the network at all and would have confiscated capitalist cargo's. Outside the Crimea that won't be a problem. Putin is an old cold warrior but not a communist. Neither he nor his rivals in Washington will be there long. I'm looking in terms of decades not years.

The global big build.
Down in Africa there are plans for big networks linking the landlocked countries and crossing the continent in two places. Mozambique to Namibia via South Africa (already exists but needs upgrading); Tanzania to Zambia (and via Zimbabwe to South Africa and Namibia). South Sudan to Cameroon via the Central African Republic. The intention is to match in Eurasia and Africa and South America the success of the US Transcontinental railroad of a century ago. Most are nearing completion.

Some might think that differing gauges might be a problem but that being solved in several ways. Containers are themselves a solution to that problem and in the earliest case a product of the different gauge problem.

Regauging. The Belorussians at the border with Poland jack the carriages up off the bogies. Roll out the bogies and roll in a new set. The track section has both gauges. This involved a lot of men undoing bolts but robots are being deployed and the bolts replaced with container like interlocks. The passenger never need to leave their carnage and some sleep though the process. at 3.40. There are several regauging stations around the world. This is a relatively old solution.

However the Talgo system from Spain looks like it will superseded most alternatives. The wheels themselves can be locked into different positions laterally for different gauges.
Trains using this system now regularly traverse Europe with with its gauge differences between Spain and France/ Germany. It's being tested in Russia. The mechanism was invented when I was 9. 1969 but we had to wait for advances in metallurgy to make it commonly accepted. This is every bit as cool as 3D printing.
There is also a Polish competitor with another spring loaded system.
If you know Polish this is a good review of the current regauging technology and related systems.

However the simplest and cheapest solution for older smaller lengths of track is to put a track renewal unit down the track changing it to the commoner gauge. Differing gauges were not an accident often it was to stop rail based armies rolling into your country a long your railways. If the had to stop and change train then you had time and opportunity to set up defenses or bomb the hell out of the rail border crossing. It worked well for the Russians and was a reason why the Nazis left Spain alone.

In simple terms China and Europe are now linked via rail with a capacity exceeding 3 freight trains per week and rising to 21 soon and at half the cost of shipping and equivalent volumes. There are more routes with new or renewed tracks are being laid. The cold wars geography drove shipping but that's over. There are rail links being forged across Eurasia. North south, east and west. As well as China, India, mainland southeast Asia, the middle east are all being inter linked to Europe and even Africa.
This will compete with shipping where it essentially circumnavigates a continent. As a result when the world economy recovers or reforms itself after this next depression. Shipping may lag as an indicator.

I have included a lot of youtube links. A picture is worth a thousand words, a video much much more but you don't need to watch them all the way through unless you have time and find it cool like me. This long but hopefully comprehensive and covers all the variables and caveats.