THE Baltic Dry Index (BDI), which measures the rates for

chartering the giant ships that transport iron ore, coal and grain,
has long attracted the attention of commentators hoping to take
the pulse of world trade. The cost of shifting the basic raw
materials that are the ingredients of steel, energy and food
supposedly provides a leading indicator of the state of the world
economy. If so the forecast would suggest that a storm at sea
will shortly make landfall. The index, a composite of rates
charged on a variety of important trade routes, has hit an all-
time low, after sinking by 65% in the past 13 weeks alone. Even
in the depths of the financial crisis shipping rates kept their
heads further above water (see chart). Why are they so
remarkably low now?
There is no doubt that world trade is slowing down. Chinas rip-
roaring economy, the destination for well over half the
worlds ship-borne iron ore and 25% of coal, has cooled. It grew
by 7.4% last year compared to well over 10% when running at
full tilt. But although the world economy is quite weak it is far
away from the apocalypse that the index apparently foretells.
The reason that the BDI has taken such a precipitous dive is that
it is a measure both of demand for shipping and of the supply of
vessels. Sliding charter rates are more a reflection of the eternal
optimism of shipowners than a calamitous foundering of the
world economy.

Episodes of short-term volatility are one way that the touchiness

of the index to the vagaries of supply and demand manifests
itself. The supply of ships is inelastic; it takes around two to
three years between ordering a new vessel and its launch so the
response to shifts in demand is slow and conditions can change
while additions to the fleet are under construction. Even the
location of ships can play a big role. If the number of cargoes on
a particular route outweighs the available hold space on that
route the index can soar, just as it can plummet if the opposite is
trueeven if worldwide the total of cargoes and ships is in
balance.

The current malaise is much more a result of the overall supply

of ships than a harbinger of doom for the world economy. In the
run up to the financial crisis, as the world economy boomed and
rates hit new heights, shipowners ordered a huge tonnage of
bulk carriers. These hit the waves during the post-crisis slump
that was already weighing heavily on demand for ships, which
pushed charter rates lower still. Just as scrapping and a
slimming of the order book was eroding the oversupply of ships,
an uptick in Chinese coal imports in 2013 prompted another rash
of orders. Ship owners reckoned that Chinas appetite for coal
would keep growing. But the countrys policy of weaning itself
off dirty energy has contributed to a rapid decline in
imports, leaving another glut of new vessels and rock-bottom
rates for their owners.
Dig deeper:
The Baltic dry index has hit a 30-year low (March 2015)
There are growing doubts about what the Baltic dry is actually
signalling (July 2010)