On Friday, 11 January, the relatively obscure and little-noticed Baltic Dry Index, which is a measure of the global shipping rates for commodities, posted its steepest one-day decline since 1989, dropping 384 points, or almost 5%.
On Monday, Asian stocks started to slide. First went the shipbuilders—South Korea’s Hyundai Heavy Industries Co. started a two-day slide that’s still continuing, falling to a four-month low. China’s Guangzhou Shipyard International Co. dropped 9.2%. By Tuesday, every Asian benchmark other than Taiwan’s retreated, mostly stoked by fears of a US recession.
Just a coincidence? Probably not. “It could be that in 12 months’ time, we look back and see (the drop in the Baltic Dry Index) was the start” of a recession, London-based Andreas Vergottis, who manages $1.2 billion for Tufton Oceanic Ltd, told Bloomberg. Tufton is the world’s biggest hedge fund dedicated to shipping.
Even though most investors have barely heard of the Baltic Dry Index, over the past few years, it has become an important economic indicator. In fact, shipping rates as measured by the index, which has roots going back 250 years—have been providing economists and commodities traders some of the most solid indicators of the direction the global economy is headed in. The index, which is published by the London-based Baltic Exchange, basically is a compilation of global shipping costs for most commodities other than oil (thus, the dry index).
Lower shipping rates, as shown by the index’s last four months of weakness, show a dropping off in demand for commodities such as cement, coal or iron ore; rising demand for such commodities usually translates into significant economic activity down the line.
It sparks concerns about the health of the Chinese and the US economies, which together account for almost 60% of all commodities being shipped anywhere in the world on the 22,000 ships that make up the world’s shipping routes.
Because it does not include container ships that carry finished products and fluctuates with the demand for shipping capacity for commodities that are precursors to production, a drop in the index today has often been reflected in a drop in production a few weeks down the line.
“It’s a leading indicator in the sense that this represents cargo that is two-three weeks away from being put on the boat, and maybe a month from being delivered,” said Phillip Rogers, a researcher at Galbraith’s Ltd, a London shipbroker. “So, a look at the index today tells you what kind of economic activity you are going to see a month or so down the line.”
For those trying to read the treacherous and often misleading tea leaves of the world’s economy, the Baltic Dry Index is often seen as one of the most robust measures of the health of global trade.
Goldman Sachs Group Inc., for instance, cut its forecasts on regional expansion because of its predictions of a US recession, citing, among other indicators, the weakness of the Baltic Dry Index.
“People have been paying a lot more attention to the index lately, especially since it was reported that Alan Greenspan had called it the best leading indicator of global economic growth,” said Jeremy Penn, the chief executive of the Baltic Exchange Ltd, referring to the ex-chairman of the US Federal Reserve Board.
Indeed, time and again, rapid movements in the index have preceded major shifts in the global economy. In September and October of 2003, the index suddenly doubled to about 4,400, its highest then. In the two months that followed, commodities markets started a steady upward climb that is now widely acknowledged as a bull market initiated by China’s commodities demand. In late 2000, the index weakened, signalling trouble: global economic indicators languished, and finally plunged after the US economy entered a recession after the 9/11 terror attacks.
For India, where a booming economy driven by private and government investment is going to fuel consumption of steel, global freight rates are going to become a huge factor in the costs equation, according to experts (two of India’s shipping routes were added to the exchange six months ago, and Indian cargo movements are about 3-4% of global shipping volume).
“It’s an incredibly important leading indicator, especially for the steel industry,” said Rakesh Arora, an analyst with Macquarie Group Ltd’s Mumbai offices. “India’s biggest import for the steel industry is coking coal, which we ship from places as far off as Australia.”
That healthy demand for coking coal shows up in steel production figures—and a large set of end users such as car and refrigerator manufacturers—just a few months down the line.
China currently makes up for almost 40% of the global movement in commodities—a radical change from just eight years ago, according to Penn, the official at the Baltic Exchange and during the last recession in 2002-2003, had kept the global economy steaming on in spite of lowered economic activity in the West.
The index, which is reported once a day by the exchange, can be checked out on Bloomberg terminals, and also daily Reuters updates, but Penn, the Baltic Exchange’s chief executive, said that in the past year more and more people were asking to be added to the lists that receive the exchange for a fee.
“In the next year or so, you can’t not pay attention to the index,” said Arora, the Macquarie analyst. “If you’re a domestic producer, you should be happy if the index stays strong—you have a competitive advantage over the imports. But if you’re an export oriented unit, you could be hurt.”
Alaric Nightingale of Bloomberg contributed to this story.