Sustained recovery in Baltic Dry Index?

Aug. 30--The Baltic Dry Index (BDI), which tracks global shipping prices of various dry bulk cargoes, has shot up sharply in the last 42 days. The index has gone up by 60% to 2,712 points as on 27 August from its 12-month low of 1,700 seen on 15 July. This increase can be mainly attributed to higher iron ore imports to China, the world's largest iron ore consumer. Iron ore is one of the major dry bulk commodities transported through sea.The BDI, which is normally considered a good economic indicator, had touched a record high of 11,793 points on 20 May 2008 before falling dramatically during the global financial crisis. A rise in the index is said to indicate that global economy is picking up.

But the big question is whether the rise in the index sustainable. To start with, the index is notorious for its volatility. So near-term trends do not necessarily indicate whether global economic conditions are improving or deteriorating, according to shipping analysts. 

"The BDI is driven more by the Chinese economy and right now they are importing a lot of iron ore," said Param Desai, shipping analyst at Angel Securities Ltd. Most analysts were of the opinion that the index is bouncing a bit after hitting the 12-month low.So far, since 20 May 2008, the index has averaged 3,465 points. This means that at 2,712, the index is still at a much lower level.

"Right now, a lot of volatility is happening. We should see flattish to moderate growth in the index for the year," said Desai. 

Also, the US and Europe have still not recovered completely. In fact, the latest data seems to show that growth is slowing in the US. China is going slow on its property market, which would hit demand for steel. If demand for steel is dented, iron ore demand would be automatically affected because it is the key raw material used to make the alloy. China is cutting steel production because an increase in inventories has put pressure on prices. The global steel industry, too, is lowering production.

Meanwhile, when freight rates were peaking in 2008, a lot of ships were built. Unfortunately then, global trade took a hit creating a huge oversupply of vessels in the market. This has affected shipping companies adversely. Shipbuilding order inflows are hard to come by. The Gulf of Mexico oil spill, too, has added to shipbuilders' woes. Given that the outlook for shipping companies is expected to be muted over the next two-three quarters, the current rise in the BDI is unlikely to signal a return of the high tide that lifts all boats.

Pallavi Pengonda

source: http://www.istockanalyst.com/article/viewiStockNews/articleid/4450716