The Baltic Dry Index is all at sea and this is making global investors edgy. The index sank like a stone, to hit an all-time low of 290 points on February 10. Baltic indices are one of the most widely watched global benchmarks and are believed to be leading indicators to everything from the state of the world economy, to the outlook for commodities.
What is it?
The Baltic indices track how much it costs to move materials by sea. There are three major indices in the group — the Baltic Dry Index which takes freight rates for bulk commodities such as coal, iron ore and grain, the Baltic Dirty Tanker Index which tracks rates for crude oil, and the Baltic Clean Tanker Index for petroleum products. These indices are published by the London-headquartered Baltic Exchange since 1985.
Why is it important?
The Baltic indices are considered leading indicators of global economic health. Most world trade, after all, still happens over the sea and by ships. So, if the Baltic indices move higher, it suggests good demand for shipping, an indicator that global trade and the economy are expected to sail along fine. But if they scrape the bottom as the Baltic Dry Index did earlier this month, it suggests anaemic global demand for goods — indicating worries on trade and economy.
The world economy is now navigating choppy waters with the mega commodity guzzler China losing steam. This has meant a meltdown in commodity prices, with exports of many nations including India taking a hit. Weak global trade is leading to pain in the Baltic Dry Index. But there’s another factor at play too — the number of ships lying idle. In the go-go days before the global financial crisis struck in late 2008, shipping companies went on an ordering binge and added aggressively to their fleet sizes. And why not - the Baltic Dry Index was at a lofty 11,800 points and seemed set to head higher. But after the party ended, all these new ships, bobbing in the waters, have left shippers high and dry. The twin whammy of weak demand and oversupply of ships has laid low the Baltic Dry Index - it has lost about 98 per cent from the peak. Ouch!
The point is, while the Baltic Indices are an indicator of global demand conditions, that’s not the only factor impacting them, ship supply dynamics matter too. So, all-time lows in the Baltic Dry Index may not be a sign of impending doom. Here it is worth noting that the Baltic Tanker Indices, both dirty and clean, have dipped far less than the Dry Index in recent months. Importing countries seem to be making the most of the crude oil decline to shore up their reserves and product supplies.
Why should I care?
Why should you not? A healthy global economy will mean better economic growth for India and better employment and income prospects for you. Commodity price swings directly decide domestic inflation rates and whether they will pinch your purse. For those of you who dabble in stocks of commodity or shipping companies which have sunk in this rout, it is the Baltic Indices that will bring advance signs of better days ahead.
The bottom line
Worried the global economy is rudderless? Watch the Baltic indices; they’ll give you direction
(This article was published in the Business Line print edition dated February 23, 2016)
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