Global economic growth key indicator

The Baltic Dry Index, an increasingly popular key indicator for the economy, measures the global shipping rates of transporting bulk dry commodities worldwide.

It is considered a key indicator, because it gauges the demand of the basic raw material inputs that go into almost every factor of finished goods, building materials, and food.

The index registers a high number when economies are strong—because of strong demand for all commodities like zinc, iron ore, iron, steel, etc. In an economic slowdown, demand falls, and so do rates.

Just before the stock market crash of 1987, and just before the Dow Jones Industrial Average lost about 4,000 points in 2001 and 2002, the Baltic Dry Index dropped significantly, reflecting the economic slowdown before the market did (source: Baltic Exchange).

It’s scary to see that this key indicator recorded its lowest level in 25 years last week.

In January of 2012, while the stock markets were rising, the index had its poorest showing since it began recording prices back in 1985.

To provide an example, six weeks ago, large freighters carrying grain were able to charge $15,000 a day. Today—just over a month later—the rate is $6,000 a day. Talk about economic slowdown!

In all fairness, new ships have entered the market. It takes a few years to build these ships and, of course, when the economy was going gangbusters like back in 2007-2008, the orders were flooding into the shipbuilders. After the economic slowdown and crash, these orders could not be cancelled.

The global fleet stands at 8,900 today, but could expand by another 1,246 ships this year (source: Baltic Exchange).

Despite the rise in new ships, clearly, the demand worldwide is not materializing along with it. It is one thing to say that rates have fallen, but it is another to say that the economic slowdown is so severe that rates are now

below operating costs.

In Asia, charter rates have fallen over 60% in the last two months because of the economic slowdown!

One Australian firm needed to get its ship to Europe. Instead of paying the cost of moving the ship empty, it offered Glencore International Plc minus $2,000 a day, for the first 60 days of the charter, to move Glencore’s grain. Basically, for the complete trip, Glencore is paying some of the fuel costs; that’s all.

Some have criticized this key indicator as hitting new lows because of the oversupply of vessels; but again the economic slowdown worldwide is pressuring rates to a level below operating costs.

The fact that the Baltic Dry Index has predicted other market falls and economic slowdowns before is also noteworthy. No indicator is foolproof, but since it has been a very accurate key indicator in the past, it is certainly worth paying close attention to the fact that the Baltic Dry Index is screaming, “More economic slowdown ahead!”