Many analysts view the Baltic Dry Index, a measure of shipping costs for dry commodities, as a forward macro-economic indicator.
So should we be worried by the fact that the index last week experienced its biggest weekly decline since 2008?
As Bloomberg observed on Friday:
The index tracking transport costs on international trade routes slid 18 percent this week, according to the Baltic Exchange. That’s the most since the last week of October 2008. Today the gauge fell 90 points, or 3.2 percent, to 2,694 points, led by a 7 percent drop in rates to hire capesize vessels that typically haul iron ore, a steelmaking raw material.
And here’s the turnaround in chart form:
Barclays Capital analysts appear to have seen reason for concern — on the technical side at least.
In fact, they warned last Tuesday that any break below 2994 could set alarm bells ringing (our emphasis):
Over the past three months, the Baltic Dry freight index has been out of kilter with risk markets: rising as equity markets fell and now falling as equities markets recover. We regard the index as a lead indicator for the global economy, and while it is not yet heralding a major downturn, the 9-day RSI is at levels consistent with previous lows. However, over the past year, the index has repeatedly struggled to sustain a break of retracement levels, and a large head and shoulders top appears to be forming. We are neutral at current levels, but a break below the neckline at 2998 would set the alarm bells ringing.
As the first chart clearly reflects, the index was trading at 2694 as of close on June 18 — which of course is well below that 2998 level.
As to what’s behind the move, Icap’s latest shipping report blames it entirely on spare capacity in the Chinese steel sector, where output has been steadily achieving above pre-crisis levels since mid-2009:
Or as Icap preferred to describe it, “chronic overcapacity” — especially since it has taken until the second quarter of 2010 for other major Asian producers to return to pre-crisis levels.
Of course, a more flexible yuan exchange rate policy in China is hardly going to improve the situation either.
Related links:
China tightening? Yeah right. – FT Alphaville
Is China on the verge of a commodities unwind? – FT Alphaville