Baltic Dry Index plunge signals a major drop in economic activity
by Maurizio d'Orlando
Index loses 53 per cent in three years. It is a measure of maritime shipping costs for commodities like minerals and grains (with the Pacific Ocean as the hub). The recent decline reflects trends in industrial output in Asia, especially China.
Milan (AsiaNews) – The Baltic Dry Index (BDI) hit a new low at 1.013 points (pts), dropping by 40 pts (-3.80 per cent) from the previous closing. This represents a drop of 47.51 per cent in 35 days compared to the 12 December session, when it closed at 1,930 pts. In the past 52 weeks, it slid by 53.38 per cent from a high of 2,173 pts (set on 14 October 2011). Yesterday’s level represents the lowest in the past three years and is a sign of a steep and sudden decline. This is important because it is an indicator of deep cuts in basic economic activity in Asian nations on the Pacific Ocean, most notably China.
The index had also taken a nosedive in 2008, but one that was even steeper than the current one. On 20 May 2008, the BDI had hit 11,793 pts, its highest level since it was first introduced in 1985. Only six months later, on 5 December, it hit its lowest point (in the middle of the post-Lehman Brothers crisis), at 663 pts for an overall decline of 94 per cent.
In order to understand the importance of these numbers, we must first consider the term itself. The Baltic Dry Index has nothing to do with today’s Baltic Sea, because the bulk of today’s maritime trade takes place in the Pacific, but it did 270 years ago, in 1744 to be more precise.
The BDI is a measure of costs for commodities shipped in bulk dry cargo carriers. In practice, it refers to shipping costs for goods, especially mining products (mostly coal and iron) and grains (wheat, soya, maize and other cereals), transported in bulk quantities in big cargo ships (from 30,000 to over 100,000 tonnes per ship).
The BDI is equally important from a macroeconomic point of view. It is a good indicator of trade in raw materials and agricultural commodities. For instance, shipments of minerals are an indication of basic industrial trends. A drop in iron ore shipments reflects a lower demand for steel in construction and heavy industry. A drop in agricultural commodities indicates lower output since relative demand for food staples tends to be stable, albeit on a slightly upward curve. More recently however, the relation between agricultural production and demand (tied to consumption and economic cycle) has been less significant because a substantial portion of grain production has gone into non-food use, like biofuels.
Since bulk dry cargo ships carry commodities used in semifinished products and industrial goods like cement and (coal-generated) power, the BDI is a forecasting tool of future economic activity.
Presently, because most primary industrial production is centred in Asia, especially China, so most bulk dry cargo shipping criss-crosses the Pacific. Thus, the current low BDI indicates a major and sudden drop in industrial production in Asia, chiefly in China, down to one of its lowest point, about a tenth of what it was in 2008.