The Baltic Dry Index (BDI) — a measure of shipping costs for dry bulk goods — suffered its 29th consecutive daily decline on Wednesday, to record its longest losing streak in more than six years, according to Bloomberg.
It’s news that David Rosenberg at Gluskin Sheff, amongst others, managed to get pretty excited about on Wednesday. He, for example, thought it’s the sort of story that should have made the front pages by now:
The problem for the commodity complex in general is that the Baltic Dry Index, a usually reliable leading indicator, has plummeted by half since the end of May, is down now for 29 consecutive sessions and is at its lowest level in more than a year. Not to mention the fact that this is on nobody’s radar screen (page 21 news in the FT)!
And while many economists still view the index as an extremely useful barometer of global productivity trends — it appears there are some growing concerns about its usefulness today versus its usefulness say two years ago. And it’s all down to shipping supply.
Julian Jessop, chief economist at Capital Economics makes the case as follows:
The BDI is a composite measure of the cost of hiring a ship to transport dry bulk commodities such as grains, coal and metal ores. It is therefore understandable that the near-50% fall in the index since late May is attracting plenty of attention. However, there are two reasons to be wary of making big calls on commodities (or anything else) on the basis of the BDI.
For a start, fluctuations in the index could be driven by changes in the supply of shipping as well as in the underlying demand for commodities transported by sea. For example, a fall in the BDI could reflect an increase in the number of ships available to carry dry commodities (either new-builds or conversions from other uses, such as oil tankers). Similarly, the BDI might be distorted by temporary port closures, changes in the cost of fuel and insurance, and many other factors.
On the supply side, Jessop notes that there was a surge in orders for new cargo ships in 2007 and 2008. And since it takes about two to three years to build a ship that supply should be making its way to market right about now.
Hence, says the economist:
It is therefore at least conceivable that the BDI could fall further this year even if commodity prices rebound, provided the corresponding increase in demand for shipping is more than offset by an increase in supply.
But it doesn’t stop there. While the idea of a shipping index being a leading indicator might make logical sense, the BDI’s actual track record is pretty poor, says Jessop.
For instance, the best that can be said about the index is probably that it tends to move up and down at the same time as global commodity prices — hardly insightful.
He adds:
But as these prices are also directly observable, and given that almost all commodities now have well-developed futures markets, the BDI is not much use as an additional forecasting tool. Indeed, it has often sent misleading signals, particularly for industrial metals such as copper. (See Chart 1.) The correlation with agricultural commodities has been more reliable (reflecting their greater importance in the dry bulk shipping market), but again the BDI is no more than a coincident indicator.
And here’s the proof:
Related links:
27 days later - FT Alphaville
What’s up with commodity currencies? – FT Alphaville
Freight fright *alert* – FT Alphaville
China tightening? Yeah right. – FT Alphaville
