by Calculated Risk on 1/10/2011 11:26:00 AM

I've received several emails recently about the Baltic Dry Index (BDI). This is an index that tracks certain international shipping rates. Here is the Baltic Dry Index from Bloomberg. (and another site with a longer term chart).

From Wikipedia:

[T]he index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic — it takes two years to build a new ship, and ships are too expensive to take out of circulation ... So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.

So some people have tried to use the BDI as a forecasting tool, but it can't be used in a vacuum. In fact - as the charts at the links above show - the recent decline is nothing unusual.

Here are a couple of article that explain the recent weakness:
• From Bloomberg: Freight Rates Tumbling as 35 Miles of Ships Passes Ore Demand

While about 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations, the slump in rates is being caused by a vessel surplus not a contracting world economy. ... The surplus was caused by orders placed in 2007 and 2008, when daily income averaged about $111,000.

There are many more ships coming online - no surprise since shipping rates went through the roof a few years ago and it takes time to build new ships!

• And this from Bloomberg last week: Queensland Flooding to Cut Freight Rates as Coal Transporters Lie Idle.

Freight costs fell as Queensland’s worst flooding for 50 years prompted buyers of the Australian state’s coal to cancel ship charters, intensifying competition for cargoes as the extra vessels become available.

BDI signaling a slowdown? Yawn. No worries.