Chart-catching - Baltic Dry Index
Coming in from the cold?
Source: Factset, Waverton
The Baltic Dry Index isn’t the economic bellwether that it used to be. As an indicator for pricing the movement of major commodities like copper and iron by sea, it is more likely to show the imbalance of demand for space and supply of enormous ships than economic confidence. The above chart shows both – the huge collapse and partial recovery during the Global Financial Crisis (changes in demand) and then the structural decline of the index from that point (oversupply of ships made worse by quantitative easing).
However the sudden collapse in early 2016 caught commentators’ attention as it fell to multi decade lows and a huge step down even from Financial Crisis trough. The bottom in late February came at the nadir of global market confidence in the ability of China – the great engine of growth post 2007 – to continue to grow, build and consume. The Chinese government stepped in to expedite short term infrastructure projects and this built demand not just for the import of hard commodities but also other types of construction in China. The index is now up over 200% off its bottom.
It remains, however, 92% down from its pre financial crisis high. The recent collapse of Hanjin Shipping - one of the largest shippers in the world – is testament to that fact. To see a sustained recovery in the index you’d want to see a lot of these Hanjin ships come out of the market completely (ie scrapped) and the tentative recovery in Chinese demand become structural and global. Given both the continued easy supply of money and the past decade’s bubble like build out of Chinese infrastructure and residential, that is a difficult bet to make.
By George Palmer
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