10 March 2016
The Baltic Dry Index is often quoted as a measure of the strength of the global economy.
It works like this. There are a fixed number of dry bulk carriers (ships) in the world and it takes 2 years to build a new one. Consequently, demand on ships has an immediate effect on freight price. The Baltic Dry Index is an aggregated index of the global dry bulk freight prices being quoted. It's updated daily.
Dry Bulk Freighters move commodities - ores, grains, minerals; raw material for manufacture. Hence, an upward swing in the Baltic Dry Index indicates a greater volume of commodities looking to being shipped; a leading indicator that the global economy is improving.
The BDI is currently showing a steady downward trend; the cost of shipping commodities is getting cheaper. However, nobody seems to have factored in the dramatic once in a lifetime fall in global oil prices - a major cost in shipping, as well as the oversupply of freighters built during the lead-up to the GFC.
Michael Pascoe also notes that trade indexes based on the total value of commodities being shipped aren't much use either; we need to look at volume...
You've seen the stories about the worrying dive in world trade, the most recent being China's import and export figures this week. And never far away is something alarming but facile about the Baltic Dry Index collapse portending further disaster. (Commentators often like to throw the Baltic Dry Index around just because it sounds nifty.)
But what if those stories weren't quite what they seemed, what if international trade – the global economy's life blood – wasn't so much smaller as cheaper? As for the Baltic Dry Index (a measure of shipping capacity), the scaremongers are likely to be guilty of ignoring what's happened to supply and therefore making false assumptions about demand.