UsableMarkets

For those of you who follow such things, it has certainly been interesting to note the decline in the Baltic Dry Index (or BDI). I have, for the moment anyway, a chart of the BDI in the right column of this blog. A quick glance will show you its direction. Namely: down.

I wasn’t the only one who was wondering at the decline of the BDI, and stories from The Economist and FT’s Lex discuss the meaning behind it.

The Economist says:

There are growing doubts, however, about what the Baltic Dry is actually signalling. The confusion is whether the index is saying more about the supply of ships than the demand for their cargoes. The index spiked dramatically in 2008 as China’s imports of commodities soared at a time when the supply of ships was constrained and port congestion added to demand for capacity (see chart). The financial crisis soon caused the index to fall back but not before this period of dramatic growth in demand from China had prompted a surge of orders for bulk carriers, especially the very largest ones that are used on the China trade routes.

These ships take around three years to come on-stream. Despite the cancellation of some orders the new ships are now flowing in: in the first half of this year the global fleet increased by 23% as new vessels came into service at the rate of 16 a month. There are now 23 such vessels arriving each month, adding to oversupply.

So, oversupply of ships? The FT’s Lex concurs:

Several analysts have poured cold water on the BDI’s prescience though, given some obvious distortions. It takes about three years to build new capacity and, as the peak of the commodities bubble was two to three years ago, new ships are now depressing charter rates. The global fleet has expanded by about a quarter this year alone. For now, other indicators of commodities demand trump the BDI.

Cross-checking with ostensibly similar global measures such as air freight sheds little light on the matter, but rail traffic compares more reliably. Trains carry the same types of materials as shipping and volumes rather than tariffs are reported while capacity changes only slowly. American carriers provide the most detailed and timely data and they continue to report outstanding year-on-year gains for tonnage of key industrial commodities such as metallic ores, coke and lumber, up 93 per cent, 28 per cent and 11 per cent for the first 27 weeks of the year, respectively.

However, both articles hedge their bets. With the threat of a double dip recession, that’s probably smart. And if it comes to pass, the BDI may not be so misleading after all.

~alex