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It seems to be the fate of bulk shipping markets to be constantly misunderstood. In January, a precipitous plunge in rates for the largest dry bulk carriers led to a panic that this was finally the leading indicator of the end of the commodity boom. That was even though those involved in the market insisted the main problem was a short-term drying-up of supply of iron ore and coal and a consequent short-term over-supply of ships. Now that the market is again back near record levels - as you can see at DryShips, one of the largest bulk operators - some analysts are again linking rates to a wider economic trend, the spike in worldwide food prices.

The link is definitely there this time - but more weakly than most people realise. Rates for the biggest bulk ships - the Capesizes, so-called because they have to go round Cape Horn and the Cape of Good Hope instead of using the Panama and Suez Canals - have risen far more sharply than those for the smaller sizes of ships. Capesizes are used exclusively for shifting the goods that move in the largest quantities, coal and iron ore. Their high rates consequently cannot be a direct result of strong demand for wheat, soyabeans or any of the other agricultural products that go in bulk carriers.

Instead, respected market observers like Martin Stopford at Clarkson, the London shipbroker, and Howard Bright at Braemar Seascope believe prices are being driven mainly by resurgent demand from steelmakers after the near-closure of the iron ore market earlier this year. “The demand is always there,” Mr Bright says of the iron ore market. “China is hoovering the stuff up. If the supply is available, they’ll take it.”

Agricultural demand probably plays a part. Instead of using a Capesize of 180,000 deadweight tonnes to shift iron ore, a charterer unhappy with Capesize rates can substitute two vessels of 90,000 dwt. Since those ships could be carrying wheat, rises in larger ship sizes affect rates for smaller ship sizes, while increases in rates for the smaller ships can push up rates for bigger vessels. The southern hemisphere grain and soyabean harvest is consequently probably helping to push up rates.

But the evidence is still overwhelmingly that other factors are more important. Capesize rates have still spiked more in recent weeks than those for Panamaxes, ships that can use the Panama Canal and carry a wide range of products. That suggests demand for coal and iron ore - the products shipped in Capesizes - is driving demand. Since iron ore exporters won a 65 per cent price increase from customers as of April 1, it would be surprising if their enthusiasm for shifting ore had not recently increased.

Even more importantly, the supply of ships is pretty much static in the face of rising demand. Martin Stopford says the world dry bulk fleet was 132.5m dwt on April 1, against 131.4m on December 31. There are many, many vessels on order out there but, for the moment, very few being delivered.

The truth of the situation is that the market for dry bulk ships - and rates for their sisters, tankers - look set to remain highly volatile for the foreseeable future. There certainly remains strong demand for the products they carry and lack of ships in key areas will sometimes create spikes of the kind currently under way or that just before Christmas in the crude oil tanker market. But shipowners’ fears - that they could find themselves with unemployed ships in brief market lulls - also occasionally send markets plunging. It is precisely the kind of situation of which analysts are paid to make some kind of sense. But, with swings so extreme and the market so prone to short-term over-reaction, it pays to treat most rational explanations with some care.

Related links
What happened to the Baltic Dry’s 15 minutes of fame? - FT Alphaville, January 2008

Robert Wright is the FT’s transport correspondent