The Baltic Dry index is an interesting index, because it shows in real time the demand and supply for non-containerized goods transport. In other words the “old style” shipping. The reason the index has over the past few years attracted the attention of analysts like me is that it provides a very good indicator of what is happening, on a global basis, to the shipping of raw materials.
However, like all index it works best when there is no externalities. Earlier in my career I was very involved in shipping finance – lots of colorful characters, but one of those ship owners told me that in his business, a single excess vessel is a glut of shipping capacity. In fact, he was just restating the sector's reality of very low demand elasticity; price rise dramatically when there is shortage, and fall equally dramatically when there is even a small surplus.
The Baltic dry peaked in early 2008 at 10,000 but today trades around 3,000. Several commentator have indicated that the fact that the BDI never recovered after the fall of early 2009 is a clear signal that there could be no V shape recover. Personally I never believed in V shape recover, most OECD economies are in deleveraging mode (or thinking about it) so there is less appetite for “stuff”. If the American consumer is going to begin saving some of his income it will have a dramatic impact on demand.
The reason that BDI is not moving relates partly to the strength of the index over the past 3 years; it takes 24 to 36 months to order and have a Panamax vessel delivered. Where as in the past the fleet of such vessels (all categories) was rising at a maximum of 40-60 vessels per month, not really a huge increase as the fleet capacity replacement rate is around 45, in 2010 the new vessels will average 120 per month. Poor demand elasticity means that even if there is a recover in raw material shipping the BDI will be a very poor indicator of recovery.
Analyst will have to find something new!
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