Baltic Dry Index – really a sign for the coming bust?

08.02.16 – Today, the Baltic Dry Index (BDIY) stands at 293 points – coming from its all-time high of 11,793 points on 20 May 2008 and from its “last-time high” of 2,330 points on 13 December 2014. Currently it seems that this index is in line with the downward movement of other indicators, like commodities, bonds, etc. However, does this correlative movement make the BDIY really a reliable (leading) crisis indicator?

A recent article in Freedom Outpost (here), later on taken up by Zerohedge suggests just that. The article maintains that the downward slides of Caterpillar, BDIY and Shanghai Containerized Freight Index (SCFI) present a logical sequence as the BDIY represents the shipping activities of raw materials into China, Caterpillar as the world’s largest manufacturer of heavy construction equipment is the main furnisher for machinery to process raw material and finally the SCFI represents the shipping activity of finished goods to the world. The fact that all three were on a downward spiral (which they were indeed at the time of the article – and still are) was seen as proof of “Economic Disaster is Headed Our Way!”

And indeed, beginning in July 2015 (see here), the BDIY (for further background, see Wikipedia), has started a downward move which accelerated in January of this year – hence being in perfect correlation with Chinese stock exchanges (for the Shanghai Composite, cf. here). Given the correlative movement, however, the BDIY may at least not be seen as a leading indicator for the Chinese economy. Also, given that the last financial crisis started in 2008 (some say it started already in 2007), but the index went on to reach an all-time high in May 2008 does not really make him a candidate for a leading crisis indicator. The indicator seems to rather correlate with the general movement of the economy.

One further argument against the reading of the BDIY as a crisis indicator may be that since the beginning of the new millennium it is a distorted index due to the built-up of huge over-capacities in shipping. And indeed, the world wide shipping capacity has to a certain degree de-coupled form the GDP growth, as a chart of the International Chamber of Shipping suggests (here). Recent reports suggest that the worldwide shipping capacity will further increase. This growing over-capacity is thus exacerbated by slower economic growth-rates. For many years, as Zerohedge quite rightly points out – whole industries – shipyards among them – simply extrapolated the (then) existing growth rates especially in China and planned their capacities (and probably their bonuses) accordingly. This model seemingly now falls apart.

When I discussed these reasoning with an expert in the shipping industry, he simply referred me to older charts of the BDIY, and indeed, when you look further in the past – to 2002 and beyond (here) – the current fall of the BDIY seems to be rather a step “back to normal”. The downsizing (or adapting to the actual growth rate of the world economy) of this over-capacity will take a while since the process of building ships is not one you can stop at short notice. Therefore, we will see a distorted BDIY for the near future.

Also, as already the abovementioned article in Freedom Outpost points out – there is not one single shipping index, but there are several – as there are several types of ships. Other than the BDIY or the SCFI, there is the RWI / ISL Container Throughput Index which is lagging behind (the latest issue foresees an increase in world-trade for 2016, cf. here).  Not all indices are distorted due to over-capacity. For example, oil and other liquid tankers until recently were in high demand (cf. here).

So, all in all, taken with a pinch (or rather a barrel…) of salt, shipping indices and the BDIY in particular might be regarded as a crisis indicator, but not a leading, rather a coincident one. This does not mean that there is no crash around the next corner – but to try to “prove” it with a downward BDIY would mean to oversimplify the economy.