Home / Commodities / A Key Economic Index Is in Freefall
Print Friendly and PDF

A Key Economic Index Is in Freefall

Written by Gary North on January 26, 2012

The Baltic Dry Index sounds really dull. Usually, it is. Not now.

This index measures freight rates for ships that transport commodities. When demand for commodities falls, less freight is shipped. But the same number of ships are competing for tonnage. So, rates fall.

Demand for commodities falls as a prelude to a recession.

A quirky canary-in-the-coal-mine indicator for global economic activity is in freefall, but market experts can’t agree on whether it’s a sign of danger or an accident of recent history on the high seas.

The Baltic Dry Index – an index of global freight rates for shipping dry commodities such as iron ore, coal and grain – had fallen for 23 consecutive days as of last Friday, cutting its value in half in the space of a month. The last time the index was this low, the world was in the depths of a credit crisis and a major recession.

How important is it? In the past, very.

While the Baltic Dry Index is obscure to your average retail investor, keen market watchers have long considered it a valuable leading indicator for the world economy, indicating shifting tides in demand for key industrial commodities. And its plunge comes at a time when the prices for many key commodities remain buoyant – a disconnect that would traditionally suggest that commodities are poised for a fall.

But this time around, the Baltic Dry may not be signalling a slump in demand, as much as the growing supply of ships to carry them.

I don’t accept this argument. There has been no huge increase in the supply of ships. The decline has come because of falling demand for commodities.

This man does not address the stability of the supply of ships

“I’d be wary about reading too much into this [fall of the Baltic Dry Index],” said Julian Jessop, chief global economist at Capital Economics in London. “The weakness … is probably telling us a lot more about the shipping industry than the commodities market or the global economy. In any event, there are many other more reliable leading indicators of global demand, such as the purchasing managers surveys.”

I am with these guys.

But some economists nevertheless are concerned that the steep and sudden tumble in the Baltic Dry Index is evidence of evaporating demand. They say it could be a sign that China – a key customer of dry-bulk goods, and notoriously unpredictable in its purchasing patterns – is stepping back from the market in a big way. If so, they said, its economy could be slowing faster than many experts think.

Print Friendly and PDF

Posting Policy:
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse. Read more.

3 thoughts on “A Key Economic Index Is in Freefall

  1. Marc Howland says:

    I first learned about the Baltic Dry Index in 2008 and it has in fact proved to be a 'Real-Time' indicator that reflects the economy in the present and near future …..

  2. When you compare the PMI historically with the Baltic Dry Index, the Baltic Dry seems to be a more "real time" indicator. The on the ground correlation with the Baltic Dry is higher than the PMI. For one it is less subjective, where the PMI is really quite subjective.
    We did not all of a sudden have a large number of new vessels built and placed into service, so that arguement is just one of academia, not very real world.
    Realistically as the United States' impact on global markets shrinks, and it has shrunk under Obama, the usefulness of the PMI becomes less valuable. It takes larger and larger swings in the PMI to mean the same thing as historic swings did. The Baltic Dry continues to be very important as it reflects movement of commodities, something which is not dependent on one countries influence in the world stage.

    Comparing the historic charts, seeing what is happening in real world terms, on the ground, it all adds up to something not so good is on the horizon. What is that? Well listen to what is happening around the world, all of the turmoil and anger. add in some crucial indicators and I think you have your answer!

  3. Along with the slowdown in trade we need to consider the inflation of currency. As prices increase, demand will decrease. Different commodities will be affected differently. One thing appears clear; investing in shipping is not a good idea. The more essential a commodity the less likely a slow down in demand.