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Sunday, 29 September 2013

What is going on with the Baltic Dry Index (BDIY)?! Does the sudden rise of this tell-tale index point at the imminent end of the economic crisis as we know it? Or is there something else going on?!

Sometimes, I don’t find the news, but instead the news manages to find me.

Yesterday, I noticed that one of my articles, which I wrote about container shipping and the Baltic Dry Index (BDIY) in February 2012, suddenly became extremely popular with over 150 reads in two days. 

This happened seemingly without a reason and without the article being picked up by another news medium. By the way, the latter doesn’t happen very often with old articles are they are just… old. So you can understand that this provoked my unconditional interest.

Therefore tonight, out of curiosity, I checked out the Baltic Dry Index to see if something happened there. And boy, did something happen there indeed. Check out the following stat from Bloomberg:

Baltic Dry Index (BDIY) 5Y chart
Chart courtesy of
Click to enlarge
Since December 2011, when the Baltic Dry Index took a nosedive of more than 1000 points, the index had not been nowhere near the 2000+ points, where it currently resides.

However, since 2 September 2013, the index climbed by 900 points to 2127 (25 September) from 1139 points (see the next chart).

Baltic Dry Index (BDIY) 5Y chart
Chart courtesy of
Click to enlarg
Could this be the beginning of the end of the economic crisis that we are currently in? Or is it a false alarm, like the sudden, sharp rises in 2010 (see the 5Y chart) had also been false alarms in hindsight, as at that moment the Euro-crisis had not yet kicked in?!

Since the beginning of 2012, the container prices showed a dramatic 1,5 year depression, as the world watched the Euro-crisis unfold and probably feared the chaos that a possible ‘Grexit’ could cause.

Another reason could have been that the extreme growth in the BRIC’s countries, which raised the demand for bulky goods even during the worldwide crisis, had cooled down substantially.  

Maybe now the time has come that many consumers and (in their trail) manufacturers in the US and Europe declare the economic crisis to be finished and put up their happy, bullish face again! The enduring American optimism and the better than expected economic results from a.o. France, Spain and Germany seem to point in this direction.

And in China there has been an important and probably influential change of power: President Hu Jintao has been replaced by Xi Jinping. The latter seems to be cautiously on the path towards more political reforms and less repression for the Chinese citizens. 

And even more important, he also seems to be on the path towards more open economic relations with the Western World. The new free-trade-zone near Shanghai and the experiments with a freely exchangeable renminbi could indeed be the beginning of better trade relations between the China and the Western World, mainly represented by the US and Europe. 

This event by itself could already spur trade and economic growth all over the world. However, you should always be careful with political change in China: mostly the political and economic changes seems more dramatic than they are, in reality. So let’s look how this possible game-changer plays out!

Nevertheless, according to the container shipping behemoth Maersk from Danmark, it  could indeed be true that a new period of growth has started. The following article comes from the Financial Times:

The world’s biggest container shipping line by market share has called the bottom of the global trade cycle, predicting that the world will come out of the funk induced by the Eurozone crisis in the coming two years.

The recession in many worldwide economies that followed the 2008 crisis caused trade to collapse around the world. The continuing recession in Europe and slowdown in China and other big developing economies this year have led the World Trade Organisation and others to downgrade their expectations for global trade this year and next. The WTO expects global trade to grow by just 2.5% this year.

But Maersk Line said on Thursday it believed the downturn in trade had bottomed out and predicted demand for global containers would grow by 4-6% in 2014 and 2015, up from recent forecasts of 2-3% for this year.

 “We believe we’ve reached the bottom of the cycle,” Jakob Stausholm, Maersk Line’s chief financial officer, told investors and analysts in Copenhagen on Thursday.
Maersk is one of the best corporate indicators of global trade as it carries 15% of all seaborne containers. In recent years it has been weighed down by the weakness of Asia-Europe trade but in a major bet on the future of global trade it has started taking delivery of the first of the world’s biggest container ships, the Triple E class each of which can transport the equivalent of 180m iPads.

Global container demand collapsed after the financial crisis, dropping by close to 16% at the start of 2009. But Mr Stausholm said such a decline was exceptional and that the present growth rate of 2-3% had historically represented the trough in the shipping industry.

“This is an extreme environment. But there are early signals that world trade is returning,” he told the Financial Times.

Container shipping is not the only part of the industry to see an increase in trade looming. The Baltic Dry index, a gauge of ship earnings for dry bulk carriers transporting a range of commodities, collapsed in the wake of the financial crisis, and last year sagged to its lowest level since August 1986. However, the index has climbed over 200% this year as trade has gingerly picked up.

The Baltic Dry is still over 80% below its 2008 peak, but some economists expects the gauge to continue to climb higher as an economic recovery gathers pace the developed world.

However, not everybody is so optimistic. The Economic Times/ India Times warns investors to be careful:

Shipping company stocks have got a Baltic boost, with the share prices of some of these companies rising by 5%-20% in a single trading session on Thursday, but analysts maintain that it's not yet time to invest in such stocks.

A rise in the Baltic Dry Index (BDI), benchmark for measure of shipping or sea freight rates across the world, is fuelling a rally in share price of companies such as ABG Shipyard, Essar Shipping, Mercator, Bharati Shipyard, Varun Shipping and Shipping Corporation of India among others.

However, market experts in India aren't too excited with the rising share prices and are discounting a pick-up in shipping trade.

"It's not yet time to invest in shipping stocks," said Saurabh Mukherjea, CEO, institutional equities, Ambit Capital. "Indian players are too small and there is massive overcapacity in the global shipping industry.

"Baltic index rally is only the result of improvement in foreign freight rates, and the rise in share price of domestic companies could be a knee-jerk reaction," said Kapil Yadav, assistant VP at Dolat Capital. Market experts say that Indian companies are usually plying small-sized vessels whereas containers listed in the BDI are large-sized vessels.

Of course the rise in foreign freight rates stands for something. However, what that ‘something’ is, is not sure at this time. 

Like my aforementioned article from February, 2012 already pointed out: higher prices are not always the result of increasing demand. They COULD also be the result of illegal price agreements between shipping companies. 

Let’s wait and see if that perhaps is the reason behind the sudden rise of the BDIY!


  1. While it doesn't change the gist of your article but just to be clear - the Baltic Dry Index has little to do with containers or indeed 'bulky goods'. It's composed of routes shipping bulk commodities so.. high volume low('ish) value such as; iron ore used to make steel, coal to drive power stations and grain for food. In this sense it is a leading indicator further up the supply chain then container prices which move manufactured products/goods. If the BDI is rallying in the short term (i.e. extracting new ships coming on market) then global demand for more buildings and products should follow. However, we should not forget that commodity firms stockpile iron ore to play the commodity so this is a large influence on importing more ore - when the price of iron ore drops they will increase imports and stock pile until the price goes up whereby they sell onto the steel mill etc.. Lastly, to respond to your final point - the BDI is based on the four major vessel asset classes (visualise ships the length 1 Canary wharf etc..) these indices are made up of daily prices quoted on the routes seeing the highest volume. These routes are averages of rates quoted by expert, independent panels of brokers with no money of their own in the market therefore no pressure to buckle under pressure from clients. Your final point about the influence of price fixing is not accurate.

  2. Thank you for this wonderfully clarifying comment. You filled in a few blank spots that I had about this index. In hindsight I could have written this article a little bit more precise. Ernst