THE BALTIC DRY INDEX / THE FINANCIAL TIMES LEX ( HIGHLY RECOMMENDED READING )

The Baltic Dry Index

Published: September 3 2009 09:23

Uh-oh. While investors have been distracted by the brightly-coloured balloons of rebounding economic output figures, the Baltic Dry Index, a measure of shipping costs for commodities, has been quietly deflating. Daily rates for leasing the largest Capesize vessels are down about a quarter over the past fortnight. Since nudging over 4000 in early June, the BDI – a composite of rates for four sizes of ship – has fallen 44 per cent.

As a gauge of demand for materials used in the early stages of production – iron ore, coal and grain – the BDI should, in theory, be an effective leading indicator for the world economy. The problem is distortions on the supply side, such as port congestion and the vagaries of a two- or three-year cycle from order to delivery of new ships. Excess capacity is about to warp the picture once more: 128 Capesizes are due to be delivered by the end of this year, equivalent to 14 per cent of the existing fleet.

If the BDI bears any relation to anything these days, it is China’s appetite for iron ore. In 2002, when the index began a six-year surge from about 1000, China imported about 110m tonnes of ore; last year, when the BDI topped 11,600 before collapsing 92 per cent, it imported 440m. As imports have soared this year, to 355m tonnes by July, the BDI has rallied six-fold. But its recent easing suggests that the long campaign by China’s Iron & Steel Association to stop speculative hoarding is finally gaining traction. According to estimates by Fearnleys of Oslo, a shipping consultancy, this year’s imports have exceeded consumption by 13m tonnes a month. Recent weakness in Shanghai iron ore spot prices, down by a fifth since early August, suggests two things – a working down of stockpiles, and fundamentally lower demand.