The Baltic Dry Index Has Crashed - Fred Dunsel

Last week, the Baltic Dry Index (BDI), a measure of shipping costs across four vessel sizes, fell to 662 points, the lowest since August 1986. Since the start of the year, the BDI has fallen by 61%. (The index measures the demand for shipping capacity versus the supply of dry bulk carriers.) As the BDI shows the cost of transporting the major raw materials by sea, it is often seen as a good gauge of the global trade volume.

However, experts are now cautioning against a misinterpretation of the BDI’s recent precipitous drop. In fact, the index’s fall does not portend a global trade contraction, but rather a fall in shipping costs. As for the latter, there are several reasons. Firstly, the supply of carriers is fast outstripping that of demand. According to London-based Clarkson Plc, the world’s biggest shipbroker, the fleet of dry-bulk commodity carriers will expand by 14% this year, compared with only a 3% increase in seaborne volumes of minerals and grains. Sverre Svenning, director of research at Fearnley Consultants, a unit of Oslo-based shipbroker Astrup Fearnley, said, “The biggest problem is that the fleet is continuing to expand like there’s no tomorrow. We’ve seen that the imbalance between demand and supply has just kept increasing.” Secondly, new carriers are being built at a faster pace because of higher efficiency. Thirdly, most of the less efficient carriers are being sold off, instead of being scrapped. The latter two trends only exacerbate the current over-supply of carriers.

Shipping analysts also noted that the BDI only measures the shipping costs, and not the volume being shipped. Hence, the recent drop in the BDI is more of a reflection of an over-supply situation. Because of this, many ship owners are now choosing to idle their ships, instead of accepting the current rates, as the returns are often too low to even cover the operating costs. In addition, ships are also slowing down their speeds and dropping anchor to better manage the over-supply situation.

Jeffrey Landsberg of dry-bulk analytics firm Commodore Research & Consultancy in New York summed up the current situation, "It's a common mistake to use the BDI as an economic indicator. It should not be used because it has little to do with demand."