FREEZING UP: 'The arithmetic on China exports is starting to look awful, particularly in year-on-year terms.' - SOCIETE GENERALE CROSS ASSET RESEARCH, on the impact of bad weather. Also, bottlenecks in coal supplies are causing power shortages and the massive human migration ahead of Chinese New Year is aggravating the problem -- PHOTO: AP

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In recent years, a huge hunger from powerhouses like China for raw materials has pushed shipping costs sky high, but the Baltic Dry Index, which tracks commodity shipping costs, has now fallen by nearly 50 per cent from its November peaks.

This dramatic slide may reflect fast-fading demand for commodities used in building infrastructure and producing exports, pointing to slowing overall growth.

This, in turn, could explain why investors across Asia yesterday were in no mood to celebrate another expected cut in the United States Federal Reserves' interest rates, even though Wall Street swung higher on Monday and Tuesday.

Recently, the plunge in the Baltic Dry Index has accelerated - falling by 13.8 per cent in the past week alone - due to heavy snowstorms across much of China.

Initially, analysts believed the index's drop would be temporary, as it might be caused by delays in raw material shipments from Brazil and China.

As the snowstorms rage, however, worries have now turned to fears that demand for raw materials may indeed be falling, as China's economy 'literally freezes up'.

Bottlenecks in coal supplies due to the bad weather are causing power shortages around China, and the massive human migration ahead of Chinese New Year is aggravating the problem.

'The arithmetic on China exports is starting to look awful, particularly in year-on-year terms,' said Societe Generale Cross Asset Research yesterday.

It now believes that China's export growth will 'collapse in the first quarter', even though it originally forecast some growth for the year.

Traders said signs of such slowing growth in China were behind much of the panic selling in Shanghai and China-heavy bourses like Singapore and Hong Kong this week.

Foreign funds had been pouring copious sums into Asian equities since late last year in the belief that these markets would be immune to a US recession.

'A slowdown in the region is being viewed with considerable alarm by foreign investors which have parked their funds in search of higher growth. Any relief provided by a further Fed fund rates cut will, at best, be temporary,' said a dealer.

Since Monday, China's Shanghai Composite Index has fallen 7.2 per cent, and Hong Kong's Hang Seng is down 5.8 per cent.

In Singapore, the benchmark Straits Times Index has slipped 5 per cent, as it gave up most of the gains from last week's relief rally after the Fed's 'emergency' cut.

In a report on Tuesday last week, Merrill Lynch chief investment strategist Richard Bernstein said the plunge in the Baltic Dry Index was in 'lock-step movement' with a widening in spreads of Asian collateralised default swaps - a type of insurance instrument that protects its holder from default by a borrower.

'Wider spreads indicate that the cost of such insurance is increasing because the perceived risk of default is rising,' it noted.

This - together with the plunge of the Baltic Dry Index - may be a reflection of a 'yet-to-be-recognised slowdown in Asian economic growth', he added.

engyeow@sph.com.sg