First time since its inception in 1985, BDI is witnessing a fall even as others rise.
The numbers don’t seem to add up. The world is in recovery mode and yet the Baltic Dry Index has dropped 64.39 per cent since last May. A key indicator of global economic health, BDI gives an assessment of the price one pays to move raw materials by sea. Higher levels of the index indicate increased movement of goods.
Since BDI is a key economic indicator, it has a direct correlation with other benchmark indices. After the world plunged into recession in 2008, BDI tanked along with gold, oil, Dow Jones Industrial Average and Shanghai Composite Index. But this correlation has gone awry in the last one year. Ever since the world started recovering in 2010, stock markets, base metals and crude have rebounded, but BDI is languishing.
So, is it safe to presume that, global recovery is not accompanied by an uptick in global trade? Partly, yes. But the divergence between BDI and other indicators has happened for a number of other reasons. The first being slowing down of the Chinese economy. Unlike other key indices which have moved up, the Shanghai Composite Index has remained flattish (up 7 per cent in one year) while Dow Jones is up 21 per cent. High inflation and rising wages has rendered Chinese exports not very competitive, claim economists. Also with the demand not having returned to earlier levels, China isn’t exporting as much as it used to.
Apart from this, shipping companies have added huge capacities in the last few years, which is why freight prices have not seen much upward movement. And finally, the Australian cyclone at the beginning of the year resulted in the closure of major ports and the movement of mining products was hit. However, none of these entirely explain the poor performance of BDI in comparison to the uptick in prices of commodities and benchmark indices like the Dow Jones Industrial Average.
If the recovery is backed by genuine demand, then the movement of BDI will improve over the next quarter. However, if world trade does not recover then commodity prices may weaken. Clearly, base metals cannot rally endlessly if the demand does not go back to the pre-crisis levels. Explains Prabir Sarkar, vice-president technical research at SPA Securities: “How the world economy fares in the next quarter will be crucial for commodity prices. If world trade does not recover then the obvious corollary is that prices of commodities will ease. However, we are bullish on gold as dollar’s recovery is temporary. Crude may remain under pressure and stay in the range of $90-105.”