We have mentioned the Baltic Dry Index in past articles and some sources claim it is the purest leading indicator of economic activity. But is it and how much faith should we put in the trends it appears to show?
Well of course we are now all muttering to ourselves we take all indicators with a pinch of salt and every measure of economic activity should be weighed against other sources of data to reach a balanced opinion, quite right, and here’s an example why.
First, what is the Baltic Dry Index and why is it so popular as an indicator of global trade? Well the Baltic Exchange from which the Index is produced is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The exchange is owned and operated by the member buyers and sellers, and maintains prices on many key routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. There is no opportunity for speculators to influence the price, all contracts are between parties with cargoes to move or ships with space. As such it is an accurate reflection of the rates being charged and the demand for space across a number of vessel sizes and routes a global measure of international trade.
The most commonly quoted of the exchanges indexes is the Baltic Exchange Dry Index (BDI), a daily index made up of 20 key dry bulk routes including iron ore, coal, cement, grains, fertilizer etc. So when the world is coming out of recession, and Asian markets in particular are showing strong growth why has the BDI been falling since the early winter?
The reason is the BDI is a measure of supply and demand, if prices rise we assume it is because demand is rising but it can be because supply is reducing, likewise in the reverse. As the Financial Times explains, capesize vessels, the largest oceanic vessels, are a case in point. Between 1980 and 2008 shipyards delivered on average one capesize every two or three weeks, slowly increasing the fleet, meeting the rising demand in a balanced fashion. But now shipyards are launching capesizes at an unprecedented rate on the back of massive orders placed when freight rates were high. Like the super carriers they build the worlds shipyards and that takes a long time turning. Orders placed one, two and three years ago are only just coming off the slipway today. Last year, they built 112 vessels, almost one every three days. This year, shipyards plan to deliver 335 capesizes, almost one every 26 hours. That figure will be reduced by cancellations and delayed builds but even so the number of new vessels is still far exceeding the still rising demand resulting in falling rates.
As the FT points out, any sudden turnaround in the BDI may have more to do with canceled ship orders, scrappage and port congestion than a major above trend increase in real demand. The BDI has its place but as all canny observers know, it is only one of many sources of information.