Baltic index on its way back to calmer waters

Most market watchers have long stopped looking at the Baltic Dry index as an accurate gauge of current global economic activity.

Just as well. The BDI, a measure of shipping costs for dry bulk goods, has fallen 26 days in a row – exacerbated by the lunar new year – and at 784 is a fraction of the level it hit nearly four years ago.

But it is widely recognised that the slump close to the December 2008 low of 663 is mainly based on a glut of vessels and easing demand rather than any calamitous drop-off in trade.

The high price of the BDI in 2008 encouraged the ordering of more vessels.

In a classic supply cycle, overcapacity has followed a period of high prices.

But that may be about to change. A tight fuel oil market has pushed prices up sharply and on some routes may now account for 80 per cent of a vessel’s freight revenue, say Barclays Capital.

Tighter credit is also forcing up capital costs.

This leaves industry operating costs above bulk rates for some companies.

Expect rising scrappage as struggling owners give up, sowing the seeds of a turn in the cycle and a bounce for the BDI.