The Baltic Dry Index has proven to be a reliable indicator of future global economic activity and could prove a useful tool amid the uncertain outlook, reports FOREX.
Baltic Dry Index and shipping stocks suffer
The Baltic Dry Index hit a two-month low this week, having plunged by one-third over the past four weeks alone. It has now fallen some 37% since peaking at its highest level since the 2008/2009 financial crisis last October. Meanwhile, the Breakwave Dry Bulk Shipping ETF – which tracks the price of one-to-six-month freight futures – has followed the Baltic Dry Index lower.
This has filtered through to shipping stocks, which have come under severe pressure this month. We have recently seen the likes of Maersk, Golden Ocean, Navios Maritime Partners and Star Bulk Carriers hit their lowest level in months, while others including ZIM Integrated Shipping, Danaos and Textainer Group have recently touched their lowest levels since 2021.
Shipping stocks hit by fears of stagflation and demand destruction
Shipping rates soared during the first 10 months of 2021 as a strong recovery from the pandemic caused demand to significantly outstrip supply, but these have unravelled over the past six months as new problems plague the global economic outlook.
We saw inflation start to rise in February and this was then exacerbated in March by both the revival of Covid-19 lockdowns in China and the eruption of conflict in Ukraine, both of which added to pre-existing supply chain problem. Russia’s invasion has also severely disrupted the trade of coal and grain, two of the most-traded products within the dry bulk industry.
Rampant inflation has led markets to believe central banks will have to be more aggressive when it comes to raising interest rates. That in turn has hurt growth expectations and talks of a possible recession have grown in recent weeks, casting a cloud of doubt over the world’s recovery prospects. This could curtail demand for products, reduce investment and prompt major infrastructure projects to be delayed, crimping demand for dry bulk commodities and pushing shipping rates lower.
Forde Morkedal, an analyst at Clarkson Platou Securities, recently warned that ‘demand destruction is a major source of concern’ for the shipping industry.
Looking forward, China offers the best hope of reviving demand if it can refrain from plunging the country back into lockdown. While it has eased restrictions in recent weeks, it is still operating a zero-tolerance approach toward the virus and the fact testing remains rife and that some areas are still in lockdown suggests Covid-19 will remain a problem going forward. But a full reopening could be hugely beneficial considering China is among the biggest consumers of dry bulk commodities like coal and iron ore.
The other headwinds look less likely to resolve themselves anytime soon considering there are no signs that the conflict in Ukraine will end, and we are yet to hit peak inflation.
Why does the Baltic Dry Index matter?
The Baltic Dry Index tracks the shipping rates for dry bulk commodities used by over 20 global routes on a daily basis, providing a holistic view of the industry.
Around two-thirds of all dry bulk trade is made up of just three commodities – iron ore, coal and grain. The remaining third is made up by the likes of fertiliser, steel, cement and salt.
The Baltic Dry Index can prove volatile, and this is because any minor changes in supply or demand can have a dramatic effect on shipping rates. Cargo ships vary in size but even the smallest that just operate along coastlines will carry at least 500 tonnes of goods, while the largest dry bulk carrier in the world can carry up to a staggering 400,000 tonnes.
Regardless of size, cargo fleets tend to remain fairly stable and new supply cannot be introduced overnight. This means any spike in demand for dry bulk commodities (or a swift reduction in the number of vessels available) can significantly push up prices as companies race to secure some space amid limited freight capacity, and quickly unwind when demand falls or more vessels enter the market.
Because dry bulk shipping involves transporting vital raw materials, this can be among the first to experience any shifts in supply and demand before becoming evident through other economic data such as manufacturing, production, or sales rates. Therefore, the Baltic Dry Index is known for being a leading indicator of global economic activity by signalling changes in the market for vital raw materials needed to produce everything from food to steel, and power major industries from construction to agriculture.
With this in mind, Hellenic Shipping News reported last month that orders and construction of new dry bulk ships has slowed significantly in 2022 as the uncertain economic outlook prompts caution, which should keep supply tight and keep the focus on demand.
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