A sudden fall in the Baltic Dry Index used to indicate a slump in demand for raw materials and therefore a possible economic slowdown, and over the past seven weeks the index has fallen 65% to its lowest level in more than 25 years.
A 6 Month Chart Of The Baltic Dry Shipping Index
Such a dramatic fall begs the question: Is the Baltic Dry Index broken, or are we heading for another global recession?
The Baltic Dry Index tracks the cost of shipping commodities such as coal, iron ore and grain around the world by sea. According to the London-based Baltic Exchange, the index has fallen for 31 days in a row and is now giving its lowest reading since August 1986.
The dramatic fall in the cost of shipping the raw materials required for economic growth, has led many analysts to conclude that the demand for commodities has plummeted and that we are heading for another global recession. There is another possibility however.
According to the Financial Post, “Capesize owners were idling vessels rather than accepting rates offered amid limited cargo bookings, and Australia was ‘awash with ships waiting to load,’ the exchange said in a report to members yesterday. The downturn is the worst in more than 25 years, said Derek Prentis, an 86-year-old shipbroker and consultant who is the exchange’s longest-serving member.”
Capesize vessels, such as the one shown here, are ships that are 100,000–180,000 tonnes deadweight. Too big for the Panama or Suez canals, Capesize vessels voyage via Cape Horn or the Cape of Good Hope.
The fact is, not only has the demand for raw materials slowed, but too many ships have been built. The dry-bulk fleet consists of more than 8,900 ships and is expanding more rapidly than demand. The fleet is due to swell by a further 14% this year, which, according to Clarkson Research Services Ltd., is almost five times the 3% gain in seaborne volumes of minerals and grains.
In conclusion then, the world may be heading for another global recession, but the Baltic Dry Index is not telling us that.