The Baltic Dry Index, which measures international shipping rates, is seen as a rough proxy for global growth. But like a negative yield curve, falls in the Baltic Dry Index have as often as not proven to be false positives.
However, the BDI has taken a dramatic turn south, and in combination with weakening economic readings in major economies, it is likely sending a true signal this time.
From the Financial Times’ Lex column (subscription required):
Yet more reason to panic? The Baltic Dry index, which measures dry bulk shipping costs, plunged by nearly a quarter last week – 10 per cent on Friday alone – as rates plummeted for the biggest ocean carriers of raw materials. Shipping groups’ shares, notably in Asia, have followed suit. Given the index’s reputation as a leading indicator, that looks scary. In fact, the index’s predictive value has weakened as it has become far more volatile than the commodities markets underlying it, gyrating around on factors such as shipping supply bottlenecks. It has twice doubled and fallen back within 15 months; its latest slide leaves it 70 per cent below its May peak….
But while its movements may be exaggerated, the Baltic Dry’s drop does reflect a weakening of Chinese raw material demand. Meanwhile, Drewry, the London-based shipping consultants, forecasts growth in container ship imports from Asia to Europe will fall from 15 per cent in recent years to 4-5 per cent this year while container imports from Asia to the US will decline 2 per cent. Just as money is no longer rocketing round the financial system, so goods flowing round the world’s seaways are slowing too.