Does the Baltic Dry Index Really Indicate Anything?

The Baltic Dry Index has just dropped for a 32nd straight day, the longest continuous drop in the index in nine years. The BDI measures daily shipping rates for dry bulk vessels that carry cargoes of iron ore, crude oil, and other commodities.

The BDI has long been seen as a leading indicator of global demand for commodities, which in turn indicates demand from consumers of manufactured goods. There are a couple of issues with this approach.

First, the BDI does not take into account the supply of vessels. If new ships are being built at a faster rate than cargoes can be found, those new ships will push down the index and provide no useful information about the demand for the underlying commodity. Second, because the BDI measures spot rates, not contract rates, it is volatile and fairly inelastic. If there are 10 cargoes and 9 ships, rates go up. If there are 10 cargoes and 11 ships, rates go down. And that all happens very quickly.

Taken by itself, the BDI probably doesn’t give much information about economic prospects. But combined with commodity pricing and available information on new vessels, the BDI does have something to say about the global economic outlook. In the current market, several observers are keeping an eye on the BDI as an indicator that the economy is or is not headed for a double dip recession.

In December, Frost & Sullivan analysts said that global shipping demand would decline by 1.37% in 2010 and 2.3% in 2011. Another industry analyst reported that 60 ship orders were cancelled in January, the third straight month of declines. The dry bulk fleet capacity is expected to grow by 21% in 2010, up 7.5% from a year ago. For 2011 and 2012, dry bulk tonnage is forecast to grow by 10% each year. All these growth rates are higher than forecast growth rates in commodity trade volumes.

Another factor contributing to the falling BDI is the number of ships being built in China. As of March 2010, the Chinese had 3,783 ships on builders’ order books, more than double the next leading shipbuilding country, South Korea. China, apparently, plans to ship its cargoes on its own vessels. As those vessels hit the high seas, demand from other shippers is very likely to fall and the BDI is likely to fall with it.

The Baltic Dry Index is not likely to be predicting a double dip recession. It is far more likely to be predicting some tough times ahead for dry bulk carriers, though, as all those Chinese vessels set sail.

Paul Ausick