CHART OF THE DAY: Why Is The Baltic Dry Index Getting Crushed?

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People can’t seem to decide if they’re concerned or just confused by the Baltic Dry Index (BDIY), which has plunged 53% since the beginning of the year.

The BDIY is a benchmark for dry bulk shipping rates and is often cited as a proxy for the global economy.

Sure, the global economy isn’t as healthy as it could be.  Just yesterday, the IMF cut its global GDP growth forecast to 3.3% in 2012 and 3.9% in 2013.  This compares to its previous forecast of 4% and 4.5%, respectively.  In Q4, China’s GDP growth decelerated to its slowest rate in 2 1/2 years.  And Japan just reported its first trade deficit since 1980.

However, none of this seems to completely justify the substantial drop in the BDIY.

Adding to the confusion is the monster rally in global stock markets since the beginning of the year, which seems to refute both slowing global GDP and the BDIY.  Even Greek and Chinese stock markets are surging.

Perhaps its not the macro economy, but rather the microeconomics of the shipping industry that are adding to volatility.  Market guru Ed Yardeni recently addressed this with The Globe And Mail‘s David Parkinson.

A few years ago, there was a big shortage of these large ships, and the [Baltic Dry] Index soared…The response to the soaring freight prices was for shipping companies to order new vessels from shipbuilders – orders that were placed before the 2008-09 recession that hammered shipping rates. But because of the lengthy manufacturing cycle for large freighters, many of those ships are only now being delivered.  Now, we have a glut of capacity for these commodities.

chart of the day, baltric dry index, jan 25 2012