Is the Baltic Exchange Pointing the Way?

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As shipping company shares drop dramatically across the world’s stock markets, could the Baltic Exchange be pointing the way for the Global Trade market during the year ahead? Several days of sharp falls in London on the Baltic Exchange’s Dry Index caused major shipping corporation stocks to fall sharply this week, led by COSCO, China Shipping Container Line and others in double digit reductions across North American and European bourses.

Followers of the rather dry (pun intended) Baltic Dry Index will know that the measure of freight rates for dry commodities like coal, iron ore and grain rose from 4,000 a year ago to 11,000 towards the year end. The Index measures the cost of chartering a ship, and although volatile and sensitive to short term chartering, demand has been an accurate measure of the strength of the global market for trade in the volume dry commodities that power the major economies. This year it has dropped out of bed, plunging to 8,000, and in the process brought down the share price of the shipping corporations. At the same time, the market takes the view that if demand is dropping for shipping space, it is bad news for the shipping lines.

It’s true to say the BDI is a very sensitive barometer and a few cautious voices are suggesting this could be a short term correction to an overly bull-run during 2007. But the drop in demand started late last year, and it has persisted since the holidays. The fear is that steps taken by the Chinese authorities to cool the country’s demand for raw materials may finally be having some effect, just as problems in the U.S. and European economies reduces demand there. It is too early to call this as a warning of impending recession, but it’s certainly one to watch in the months ahead.

We’ll keep you posted periodically.

Stuart Burns

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