The Shipping News Hits a Headwind
Garry White - Tue 18 Mar, 2008
The Baltic Dry Index is a lead economic indicator that’s started to head down.
The Baltic Dry Index is a lead economic indicator that’s started to head down says Smart Commodities editor, Garry White...
The Shipping News Hits a Headwind
By Garry White
One indicator I have mentioned to my readers before has reversed its recent trend.
It is a very general indicator and a number of factors can affect its movements, so we need to watch its movement more closely over the next few weeks. However, it is a forward indicator of future economic activity that you cannot ignore. I am referring to the Baltic Dry Index (BDI).
The BDI measures freight rates for bulk commodities such as iron ore, coal and grains. It considers 26 shipping routes measured on a time charter and voyage basis and so provides an assessment of the price of moving major raw materials by sea.
Because the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly.
The index slumped significantly in the latter part of last year, but it was arguably overvalued and in need of a correction, particularly as new capacity was hitting the market. Since January, the index has been on an uptrend, but the contract prices for hiring these ships has stumbled over the last week. It fell a further 1.4% yesterday.
If the index continues to fall, it will be a solid indication that a global recession was underway. However, the falls could also be explained by new container capacity coming on stream. Only time will tell.
I think that the BDI is a very important indicator to consider – and I wait with bated breath to see which direction it is heading from here. I’m going to keep watching the index, and so should you. It’s a very good indicator of supply and demand trends – vital information for any commodity investor.
The index has not collapsed. Indeed, it is more than 60% higher than it was a year ago, but is well off an all-time high of 11,039 set in mid-November.
Remember, this index doesn't deal in speculative factors. It is not a future price indicator like the futures market. It is based on real deals in the real world. So, these falls in the BDI reflect the fact that bookings and the cost of booking are falling.
However, we cannot take it as read that falls in the BDI are a forward indicator of recession. Since the index was established in 1985, there have been nine other periods where the Baltic Index declined by 35% or more. Over the same period, the economy has slipped into recession only twice.
It’s still an indicator you should watch, however. You can monitor it here.
Regards,
Garry White
For the Daily Reckoning
post a comment
