02/02/2012, 00.00
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Baltic Dry Index falls to record low

by Maurizio d'Orlando
Index hits 662 points. The previous low was in 2008, during the Lehman Brothers crisis. The drop reflects the steep decline in demand for raw materials, consequence of a worldwide economic slowdown. Expert tells AsiaNews that ship overcapacity is the main reason for the fall. Loans to big ship-owners now start to look shaky.
Milan (AsiaNews) – The Baltic Dry Index (BDI) reached a new low today at 662 points[1], losing 18 points or 2.65 per cent over the previous session. This is its lowest level since the index was established in 1985. The previous record low was reached on 5 December 2008 with 663 points during the Lehman Brothers debacle.

With respect to the last high point of 1930 points on 12 December 2011, the 52-day drop represents a drop of 65.7 per cent, almost 70 per cent if the previous high point of October 2011 is considered.

Although this is far cry from the record fall in 2008 when the BDI lost 94 per cent, down from a record high of 11,793 points, the latest decline is remarkable for its steepness and speed.

The BDI tracks worldwide international shipping prices of various dry bulk cargoes. The downward trend have been recorded also in tanker (oil, petroleum products, chemicals and to a lesser extent cooking oils) and container shipping (general cargo)

As AsiaNews noted previously, a drop in the BDI is important because a decline in shipping of raw materials and agricultural products is a good indicator of trends in basic industrial output, currently centred specifically in China and India, and more generally in Asia.

Speaking to AsiaNews, Giuseppe Bottiglieri, CEO of a world-class Italian company specialised in dry bulk cargo shipping, said that the drop is due to a decline in shipping of raw materials due to a slowdown in the world economy.

However, that is not all. The decline, Bottiglieri said, is also due in part to the fact that since the 2008 crisis, Chinese and Asian shipyards have continued to build bulk cargo ships to stimulate industrial output at a time of fewer orders.

For the shipping company executive, there is a problem of overcapacity caused by greater availability of ships made in South Korea and China at a time of lower demand. Still, when celebrations of Chinese New Year are over, business may pick up.

The role played by lending by banks to international shipping companies on the BDI’s decline is another matter altogether. Some companies might not survive a drop in revenue caused by lower shipping traffic and could thus find themselves hard pressed to repay loans taken out to buy ships. For their part, some banks specialised in maritime credit might find themselves in choppy waters as well.

From a macroeconomic point of view, what is happening also raises questions about the ways China and Asian nations dealt with the 2008 crisis, most notably by stimulating productive capacity, in this case shipping, rather than boosting already low domestic consumption levels. This error in method is at the root of the current overcapacity crisis.

Since 2003, AsiaNews has argued that the main problem is low consumption in the bottom and poorest tiers of the population. Obviously, no one heeded our warning.

[1] See “Baltic Dry Index,” in Bloomberg, 1 February 2012.
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