Armada of new ships sinks accuracy of the index as measure of global health
LONDON -- Uncertainty over how many new ships will be built this year is expected to marginalize a popular measure of the global economy's health -- the Baltic Dry Index.
The index, a measure of shipping costs, gained importance over the last decade as a key gauge not just for the shipping industry but the global economy. Due to the shipping industry's stable supply structure, the index was touted as a good proxy for overall demand for raw materials, the basic building blocks of an economy.
But with an unusually large number of ships scheduled to come into operation in 2010, the index no longer presents such a straightforward view of raw-material demand, and hence economic growth.| More from WSJ.com: • Fed's Hoenig Says Higher Rates Won't Derail Economy • Non-Manufacturing Data Not a Non-Factor • Deflation Threat Is Latest Headache for Euro Zone |
The Baltic Dry Index "will be less responsive to shifts in demand as the oversupply of vessels becomes more pronounced," said Plamen Natzkoff, dry bulk and freight strategist at Citigroup in London. While the index "will still reflect the supply-demand balance in the freight market," its worthiness as a wider-ranging indicator will be limited, he said.
The index's publisher defends it. "There are two elements to the BDI: demand and supply. When the supply of shipping is fairly stable, demand represents a good pointer to activity in primary industry," said Jeremy Penn, CEO of the Baltic Exchange. "[The BDI] is a good indicator of dry bulk rates in the market -- we have never made great claims for it to be more than that."
The Baltic index assesses the cost for moving bulk cargoes on major shipping routes via the four largest dry-vessel classes. It is released five days a week, and gives a comparable level of the cost of moving bulk cargoes -- mostly iron ore, coal and grains.
Historically, dry-bulk shipping costs have been able to serve as a proxy for demand because ship supply has been roughly constant.
In May 2008, the index rose to a record high of 11793 as industrialized nations demanded fodder for booming economies. But by December, as demand for bulk goods dried up, the index had slid to 663. Tuesday, the index was at 2792.
Ships take about three years to build, making supply both easy to predict and relatively inflexible. Moves in the cost of shipping have, therefore, been largely the result of fluctuations in demand for the commodities they carry.
But the stability is now faltering, some analysts say.
"What you're witnessing is a huge number of ships ordered during the peak of the market in 2007-08 being delivered now due to the usual lead times involved," said Amrita Sen, a commodities analyst at Barclays Capital in London.
She noted that there is a great deal of uncertainty this year about how many ships will actually be delivered. She said that, at the beginning of 2010, the market was saddled with orders for 1,400 new vessels this year, well above the average number during the last five years, of 283. Such a shipbuilding program could lead to a catastrophic collapse in rates.
Last year also saw a similar plan of overbuilding, only to end the year with about 240 new ships entering the fleet, Ms. Sen said, or on par with the average
"The supply glut is unknown this year," said Rob Lomas, secretary-general of the International Association of Dry Cargo Shipowners, or Intercargo. "Estimates last year were so wildly off the mark, people now are dodging all estimates this year."
So although the order book is huge again, if 2009 is anything to go by, not all these orders will be filled. Between delays, cancellations and scrapping, the actual number is nearly impossible to predict.
This instability might have eviscerated the Baltic index as a quick gauge of global growth, but this was never the purpose for which the index was designed.
Even now, despite the supply headache, the index continues to represent the performance of freight rates in dry-bulk shipping.
"The BDI can reflect increasing levels of global trade, but it can give misleading impressions, especially with the supply issues this year," said Lambros Varnivides, head of shipping finance at Royal Bank of Scotland in London. "People must drill down into why exactly the BDI is moving. It's useful but should be treated with some caution, too."
Yet shipping remains a truly global industry and its highs and lows can still reflect the general health of the world economy. While the index might not be an ideal guide, Mr, Varnivides notes that other indexes can be useful complements.
He said the Australian Coal Port Congestion Index and Capesize Iron Ore Port Congestion Index for China, both published by Simpson, Spence & Young, a major shipbroker, are worth watching, along with the Baltic Dry Index.
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