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JWPM Consulting

They're lying; world trade is improving

10 March 2016

The market demand for dry bulk carriers provides a leading indicator

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.

The Baltic Dry Index is reported daily by the Baltic Exchange in London. The index provides a benchmark for the price of moving the major raw materials by sea. The index tracks rates for Capesize, Panamax and Supramax vessels that ferry dry bulk commodities. The Baltic Dry Index is not restricted to Baltic Sea countries or to a few commodities like crude oil. Instead, the Baltic Dry Index takes into account 23 different shipping routes carrying coal, iron ore, grains and many other commodities.

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...

Read more

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 lifeblood – 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.

australiatradeeconomicsbaltic dry index

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