Why Is the Baltic Dry Index Plunging?

Montreal, Canada

The widely followed Baltic Dry Index, a popular gauge measuring dry bulk charter rates, has plunged to levels last seen during the aftermath of the credit crisis. Since October the index has tanked almost 50% to 1,453.

What’s bizarre about the performance of the Baltic Dry Index is the ongoing draw-down of the gauge even amid soaring commodities prices since August.

The Baltic Dry Index is used as a barometer to measure freight rates for coal and iron ore, among other raw materials. The largest dry bulk carriers are Capesize ships – badly affected by the sharp decline in bulk shipping rates. Since last October, rates for the largest Capesize vessels have crashed from $46,284 per day to just $10,285.

Why is this index declining so sharply at a time when commodities are firming? And is the ongoing decline a warning for investors?

Coal Exports Hurt By Flooding

Even coal prices got a fillip last week as the depth of the Queensland, Australia flooding drowned a good chunk of her coal exports this season.

Part of the problem lies with the recent closure of the Queensland port. Shipping routes are being adversely affected as supplies can’t leave Australia and more ships are backlogged.

Another bottleneck is the significant rise in the number of new vessels due this year – 241 Capesize ships, according to Simpson, Spence and Young, shipbrokers based in London. That number represents a 25% increase from the current number of 1,000 vessels now.

The Baltic Dry Index has not been a good forecasting tool for the global economy. Better measures include the Treasury’s yield curve, copper prices, bank credit flows and lumber prices. None of the above indicators is forecasting a recession.

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