The most bearish chart in the world

By Associate Editor David Stevenson Jan 31, 2012

David Stevenson

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Cargo ship and a chart of the Baltic Dry index © Getty Images

The Baltic Dry Index has tumbled

Could this be the most bearish statistic in the world right now?

Over the past month, one of the world’s key leading economic indicators has tumbled in value by 60%.

That’s not a misprint.

I’m talking about the Baltic Dry Index (BDI). It has been falling now for 27 trading days in a row. That’s since the second week in December.

So what is the BDI all about? And is this plunge something we should be worrying about?

The Baltic Dry Index has tumbled

The BDI is a key barometer of global freight activity. It’s published by London’s Baltic Exchange, the world’s leading market for buying and selling shipping contracts.

The BDI covers 26 major shipping routes. It measures the cost of transport space (shipping rates) on so-called ‘dry bulk carriers’. These carry cargoes of raw materials such as coal, grain, timber, steel and iron ore.

If the BDI rises, it indicates that shipping rates are rising, due to increased demand for transport space for raw materials. If more raw materials are being shipped, it suggests that factories are seeing higher demand for their finished products and so are planning to make more.

This makes the BDI a key leading economic indicator. Rising shipping rates suggest that manufacturing activity is improving, even before it shows up in the official statistics.

On the flipside, a drop in the BDI could suggest that worldwide demand for shipping space – and therefore, for raw materials – is falling. That in turn indicates that the global economy must be about to slow down.

But 2012 has already seen something much worse than a mere slip. The BDI has collapsed in just a month, as the chart below shows.

 Baltic Dry Index chart
Source: Bloomberg

And if you drill into the details, the picture looks even bleaker.

Some of the world’s biggest ships are known as Capesize vessels. They are so called because they’re too big for the Suez Canal and have to travel around the Cape of Good Hope or Cape Horn.

Shipping rates for these vessels have plunged by an incredible 75% so far this year.

So is the global economy about to implode?

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Bad news for shipowners

The answer isn’t quite that simple. For one thing, the BDI can be very volatile – much more so than the economy overall. Previous massive drops in the index haven’t always resulted in a re-run of the Great Depression.

That’s because the BDI isn’t just about transport demand. It’s also about transport supply. Remember, the BDI measures the cost of hiring space on a ship. So if you double the number of ships, then demand for raw materials could remain static and perfectly healthy. But shipping rates, and therefore the BDI, would (in theory) fall in half.

And the fact is that right now, there are far too many ships in the world.

Prior to 2008, when the global economy seemed to be booming, dry bulk shipowners got rather over-excited. They convinced themselves that the good times would last for several more years. So – pretty much all at the same time – they placed lots of orders for ships.

Many of those vessels have now been completed and are becoming available for hire. Extra shipping space equivalent to 23% of the existing fleet is due to be delivered this year, according to Macquarie Research. That’s “too much capacity in the face of more modest growth of trade volumes”.

In other words, it’s no great surprise the BDI has fallen back. What’s more, says Credit Suisse, there’ll be no respite from the oversupply of dry bulk ships until next year at the very earliest. Even then, the existing fleet will still grow by 9% as new ships are delivered. That could still be tough for the market to absorb.

But the rest of us can’t relax about it

Clearly, this is all bad news for shipowners. But surely it means that the rest of us can just ignore this scary message from the BDI?

Actually, no, we can’t. The trouble is that the extra ships aren’t enough by themselves to explain this plunge. As Louis Basenese points out on Wall Street Daily, the Harpex – an index of shipping rates for container ships, which carry finished goods – has also plunged, even although the supply of container ships is little changed in the past six months.

Meanwhile, Nick Bullman at risk consultant Check Risks tells Financial News that “this collapse looks similar to the falls we saw in the Baltic Dry ahead of the recessions of the late 1970s and early 1990s – but this drop is actually steeper”.

Continues Bullman: “this is signalling… that the world economy is slowing down much more quickly than people have been thinking”.

Why? It all points to China. The country is the biggest importer of raw materials and we know it’s slowing down (as my colleague Cris Sholto Heaton noted yesterday). This plunge in the BDI is another reason to believe that China can’t avoid a hard landing. That’s bound to have a knock-on effect all around the world.

Earlier in January, my colleague John Stepek warned about the danger of “a big disappointment from China this year”. And we went into greater detail on how to protect your wealth from a Chinese slump in a recent issue of MoneyWeek magazine. (If you're not already a subscriber, get your first three copies free here.)

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Comments (10)

Published in Global economy | More articles by David Stevenson

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  • 1. Andy

    (31 January 2012, 11:34AM)  Complain about this comment

    Another reason for he sharp fall in the BDI could be the fact the China expanded its shipping company COSCO

  • 2. The Buy2Let King

    (31 January 2012, 12:29PM)  Complain about this comment

    Similar falls in the BDI have been fairly common and in most cases recessions and equity market crashes did not follow

    For a more open-mined analysis check out:

    http://www.minyanville.com/businessmarkets/articles/baltic-dry-index-baltic-dry-index/1/27/2012/id/39077

    Money Week makes its living it seems from publishing an endless stream of alarmist articles, but poor analysis.

    It should rename itself 'Bear Catcher Weekly'



  • 3. NCL

    (31 January 2012, 01:08PM)  Complain about this comment

    Or perhaps Moneyweek is right to be bearish based on evident changes in fundamentals. Some would argue their commentary is not bearish enough, but I think David has it about right on this one

    Sadly, we are not prepared for what could turn out to be a defaltionary depression. Mainstream opinion has not accepted it yet, although more and more economists are finally realising this is not a recession. Despite the mistaken belief that central banks have the power to produce desirable outcomes, the fixes so far thrown at the problem have only delayed the inevitable. The BDI trend is simply reinforcing that fact

  • 4. mevans

    (31 January 2012, 03:54PM)  Complain about this comment

    Yes this is a big fall in relative terms but in absolute terms, the fall really isn't that significant compared to historical moves. The Index has fallen from 1738 to 702 this month, while the index reached 11793 on 20 May 2008 yet fell to 663 on 5 December.

    Furthermore, if you run the time series since 1985, it is clear that the rise in shipping costs from 2002 to 2008 was simply not sustainable.

  • 5. mevans

    (31 January 2012, 03:54PM)  Complain about this comment

    Yes this is a big fall in relative terms but in absolute terms, the fall really isn't that significant compared to historical moves. The Index has fallen from 1738 to 702 this month, while the index reached 11793 on 20 May 2008 yet fell to 663 on 5 December.

    Furthermore, if you run the time series since 1985, it is clear that the rise in shipping costs from 2002 to 2008 was simply not sustainable.

  • 6. Wes

    (31 January 2012, 11:39PM)  Complain about this comment

    The BDI would have to increase over 10 fold for it to reach its peak of 2006-2007. So with all this "increase" in shipping capacity the reason for this dive? I think not!! Has shipping capacity increased over 1000% in the last 2 years? NOPE! Spin this fall any way you want guys.....

  • 7. Segedunum

    (31 January 2012, 11:49PM)  Complain about this comment

    What's interesting is just how fast it has fallen in just the last month. Yes, this is due to a decline in shipping vessels, but that in turn is logically due to there being nothing much to carry in those ships.

    To claim that a nosedive like that on a statistic like that is not significant just smacks of burying heads in the sand.

  • 8. Allan

    (01 February 2012, 03:02AM)  Complain about this comment

    So what about the corresponding plunge in the HARPEX(a measure of container shipping rates),the opposite end of the supply chain.

    I suppose that is nothing to too concerned about either.

    Not to menion that idle ships make no money and global loans from shipping companies total over $500b.

    Nothing to worry about here...heard that just before the Lehmans collapse.

    The only thing we learn is that we never learn!

  • 9. NeutronWarp9

    (04 February 2012, 10:23AM)  Complain about this comment

    Wise words Allan (8). The ancients used to 'read' animal entrails to predict the future. Today we seek patterns in the beautiful logic of numbers; either 'natural' Fib-type or computer-generated ones. The problem with automated trades is that it relies upon the validity of the assumptions behind each program and the ability for mere humans to stand back and take a view. Sound familiar? The only saving grace I can see to prevent economic depression in the West is the unpredictable rise of emerging markets. America's political fixes largely amount to pain-killers to last until after the next election. Meanwhile the UK and Europe are in strait-jackets. My gut tells me this rally cannot last.

  • 10. al

    (07 February 2012, 04:35PM)  Complain about this comment

    This is a 1 year snap shot, am I being thick or is "shipping of crap to west ramps up in the quarter before xmas, then falls away" not a tiny bit obvious?

    Its a bit like saying "Toy Shop sells lots right before xmas & then not much right after!!" and thinking that's a genius insight isn't it?

    Of course if this is the first Q1 on record to see a huge drop from Q4 that would be different...

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