One of the many barometers of economic activity has started flashing a green light.
The Baltic Dry Index shows the price of moving coal, iron ore, grain and other commodities by sea. Such dry bulk is used to make concrete, steel and food – so in theory a rise in shipping costs could signal increased shipping activity and more economic production ahead.
After reaching a high in May 2008 of 11,793, the BDI had plunged by more than 94 per cent by December. It has recovered this year, before falling again, but in recent weeks it has really started moving. Since late September it is up more than 90 per cent to a 52-week high of 4,291. Last week its price gains outpaced even those of gold. Does this mean the global economy has turned the corner?
Unfortunately, this long-watched indicator can no longer be relied on. The surge in shipping costs a couple of years ago made building ships an extremely attractive business. New shipyards were planned and some built. It takes roughly two years for a ship to be delivered after it has been ordered.
Research by Simpson Spence & Young shows this year has already been a record for new ship deliveries, approaching 34m deadweight tonnes (dwt) of capacity. There remains more than 26m dwt still theoretically due in 2009. A large number of these deliveries will slip into next year, and some orders and even shipyards might get scrapped. But with the total order book representing 60 per cent of the existing fleet capacity, freight derivatives prices for 2010 and beyond imply lower freight rates in spite of the potential for increased trading activity.
The rise in the BDI shows increased demand for commodities in China after stockpiles fell. Congestion in various ports has also pressed prices. These may just offer a short-term boost, and cannot be seen as a reliable sign of smooth sailing ahead.
John Authers is on sabbatical