The Baltic Dry Index, a measure of dry bulk shipping rates for commodities such as iron ore, fell 12% this week, and is down almost 60% to 1,700 from the 4,200 level it was at back in late-May.
There have been many market observers using it as warning signal for the global economy. Such was the renewed attention brought to this index, that even The Economist gave it a spread. Indeed its collapse looks ominous, as shown below.
Thing is, we’ve argued before why the BDI isn’t a robust leading indicator. The crux of the argument is that vessel-supply effects can drive the index down even when underlying economic demand is expanding.
That’s exactly what’s happening right now, and it’s making the BDI’s decline completely meaningless as an indicator for the global economy right now. Dry bulk vessel supply rose 23% in the first six months of 2010, outstripping seaborne commodities demand growth by a wide margin. Thus as supply grew faster than demand, rates fell. Yet the key point is that global dry bulk commodities demand and related economic activity are not falling, despite the decline in the BDI.
Nothing makes this more clear than steel. The table below shows global steel demand, in millions of tons. Steel, via its inputs iron ore and coking coal, is the #1 driver of dry bulk commodities demand globally, and its demand isn’t falling. In fact, it’s set to grow 12% this year, which is a far better performance than in 2009.
Steel demand is rebounding, which exposes the Baltic Dry Index as a false indicator of ‘falling commodities demand’:
Now, steel demand could contract in the future (the same could happen to other primary dry bulk commodities such as thermal coal and grains as well), but the Baltic Dry Index is built from spot rates for shipping, it doesn’t have any forward expectations priced into it. Thus you can’t even say that the BDI is ‘looking forward’.
It’s simply collapsing since far too many ships have come onto the market, which is bad news for dry bulk shipping companies, but not a big deal for macro observers worried about the state of world economic activity.
There may be legitimate reasons to worry about global growth right now, but the BDI is not one of them, and if anyone tells you otherwise, then ask them whether global dry bulk commodities demand is expanding or contracting right now.
In addition, note that dry bulk stocks themselves, such as DryShips (DRYS), Diana Shipping (DSX), Genco (GNM), and Eagle Bulk (EGLE), have begun to diverge from the BDI’s performance, and today are outperforming the market:
Business Insider Emails & Alerts
Site highlights each day to your inbox.