THE UNDERWATER ADVENTURES OF THE BALTIC DRY / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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FEBRUARY 3, 2011, 1:37 P.M. ET.

The Underwater Adventures of the Baltic Dry .

By LIAM DENNING


Worries about food and raw-materials supply are mounting, but there's definitely no shortage of one thing: ships to ferry them around.

The Baltic Dry Index tracks the cost of shipping things like coal, grain and iron ore (not oil). It performed terribly in 2010. Down 41% so far, 2011 is shaping up to be another dreadful year.


January's slump is partly related to weather, most notably Queensland's biblical floods. Nearly a third of the world's seaborne coal is shipped from the Australian state, according to Deutsche Bank. So when mining there stops and ports close, many ships aren't needed. Floods have also hit South African mines.


The Baltic Dry is back to levels seen in the depths of the financial crisis in early 2009, and rates on large "Capesize" vessels are running at less than operating costs. That isn't sustainable, and rates should recover as weather moderates and economic recovery continues.


Such relief will likely prove temporary, though. There is simply too much capacity. Demand for cargo space should increase at a healthy clip of 8.1% this year, reckons Jonathan Chappell at J.P. Morgan Chase. But he also expects capacity to grow 11.3%, even after factoring in a higher rate of delays and cancellations for new ships. Next year doesn't look great either.


While battered stocks of companies such as Diana Shipping look cheap for value investors, they likely represent dead money for some time. But there is a hopeful point to be drawn from all this: The Baltic Dry, so long seen as a leading indicator of global economic activity, is now almost certainly a lagging one.


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