Here’s Another Reason The Baltic Dry Index Is A Weak Bellwether For The Global Economy

dry ship

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Lately, we’ve been talking a lot about the Baltic Dry Index (BDI) and how it is a relatively weak proxy for the health of the global economy.  Among other things, the BDI has a tendency to swing violently due to supply and demand dynamics within the shipping industry.Recently, Morgan Stanley analysts Sophie Loh and Chin Ser Lee published their Asia/Pacific Shipping Monthly report.

They expected the BDI to decline from December 2011 highs, but they note that the magnitude of the decline was “surprising.”

Loh and Lee identified three reasons why the rates fell. The first two were seasonal declines in iron ore shipments to China and a spike in January ship deliveries.  We’ve more or less addressed these already.

The third reason reminded us, yet again, why the BDI is weak proxy for the global economy.  According to Loh and Lee, “heavy rains in Brazil, result[ed] in fears of more iron ore shipments [being] cancelled”.  Some more detail:

Heavy rains in Brazil (states of Minas Gerais, Rio de Janerio and Espirito Santo) since mid-December 2011 have affected iron ore mining and shipments in Brazil. Parts of Minas Gerais have reportedly received the largest amount of rain in over 100 years. Vale has had to declare force majeure on 2 mil tonnes of iron ore shipments, which had a significant impact on market sentiments, while the approximately 10 Capesize cargo shipments cancelled at staggered dates should not have a significant impact on shipments. Conversely, continually bad weather could lead Vale to declare force majeure on additional iron ore shipments.

Sure, a disruption in Brazilian iron ore shipments will arguably have an impact on global GDP.  But we have yet to see any economist revise down their global GDP estimates because of rainfall in Brazil.  However, regional rainfall is big enough to have a material impact on BDI.