If the Baltic Dry Index is declining, by definition, the cost of shipping raw materials is declining.
This is important because when there is a higher demand for raw materials, the price for shipping tends to get pushed upwards. This means that what we are seeing right now with record low shipping prices, means that the demand for raw materials is lower.
Many economists and investors look to the BDI to speculate about the future. If producers are not ordering as much raw material, then they are not going to be producing as much product in the coming months and years. When the BDI is contracting, it seems to coincide with the contraction of the entire worldwide economy.
This is pretty bewildering considering the BDI is at a record low of 363. It is said that this index is difficult to manipulate since it measures raw material and is therefore not affected by stimulus and other tactics of monetary policy.
However, the correlation of a falling BDI to a falling economy is not as clear cut as it may seem. Could it be that there is simply an over supply of shipping vessels? The shipping vessels take a long time to build and perhaps some shipping companies were too optimistic. It is possible then, that the 'collapse' of the BDI is a localized issue of shipping companies producing too many ships rather than the worldwide economy drastically contracting and a much smaller need for raw materials.
This possibility could mean even more economic growth in the future (especially for exporting goods) because international shipping will be cheaper. In other words, if some shipping company owners regret purchasing too many ships, this could actually be good for the worldwide economy.
http://shipandbunker.com/news/world/730934-dry-bulk-worst-crisis-in-living-memory-continues-as-baltic-dry-index-falls-further-to-363
http://www.bloomberg.com/quote/BDIY:IND
I curious to whether there are other factors at play instead of just a lack of demand for raw materials from producers. I would assume that with technological advancement in logistics and the collapse of oil price would certainly make it cheaper to ship raw materials. With that in mind, it is hard to conclude how much that is affecting shipping costs and how much producer demand is causing BDI to drop.
ReplyDeleteI curious to whether there are other factors at play instead of just a lack of demand for raw materials from producers. I would assume that with technological advancement in logistics and the collapse of oil price would certainly make it cheaper to ship raw materials. With that in mind, it is hard to conclude how much that is affecting shipping costs and how much producer demand is causing BDI to drop.
ReplyDeleteIt is surprising to hear that demand for raw materials is declining currently. I have never heard of the BDI before this but it is a very interesting concept. I agree with Richard's comment regarding the decline in oil prices and its relationship to shipping prices. I wonder what kind of effect this will have on United States' exports.
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