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I haven't run a correlation, but I think there is a strong correlation between the Baltic Index and the Chinese stock market - so it may be more helpful in that area.

Robert D

"...the (Baltic Dry) Index measures the cost of moving raw materials by sea in container ships." That is not quite correct; instead the Baltic Dry Index measures the rates that shippers charge to move dry freight such as coal, grains, iron ore, etc. in quantity. Those are inputs to industrial manufacturing or energy consumption. Containers are moved by different vessels to ship finished consumer or industrial goods such as toys, refrigerators, clothing, etc.


The weakness in the BDI is partly due to negotiations between the Chinese gov. and the major iron ore producers- RTP, CVRD, and BHP etc. Each year in November they meet to set iron ore prices for the year. The majors want prices to rise 50%, China wants 30%. Because of this shipments of iron ore have stalled since november

They are at an impasse and in the meantime china has been buying iron ore on the spot market. They don’t like to do this it creates volatility in budgeting construction projets.

The good news is that the market is “spring loaded”. Commodities prices are still extremely high, signaling strong fundamental demand. Most analyst expect 6-8% growth in shipping demand this year, so when the negotiations work out, everything will still need to be shipped, presumably driving up the BDI.

Steven Soh

BDI is an indicator but not necessarily to be the only item that could tell whether the economy is running into recession but come what may, the BDI is a good indicator to tell us the demand of cargo vessel used, no matter it is a tanker or just a dry good carrier. If sea freight drops, it could mean the demand is soft because usage is less and given usage is less, the global economic activities should become sluggish, which could mean the economy is slowing.

rob trythall

The over-all generality of this article detracts from the hypothesis.

1) The reference to "the Index measures the cost of moving raw materials by sea in container ships." is an over-arching statement of impressive ignorance.

2) The freight market is sectorial. Ironically the container market was in depression for the first 2 yrs of the current 5 year freight market boom.

3)In each freight sector there have been periods of an inverse relationship to the size of ship ie when the daily hire rate for a 40000 dwt bulkcarrier has exceeded the rate for a 150000 dwt bulkcarrier.

4)The freight market demonstrates extreme volatility due to inherent in-elasticities between supply and demand.

5) Your caveat .." using data going back to 1985, there have been nine other periods where the Baltic Index declined by 35% or more. Over the same period, the economy has slipped into recession only twice.." puts the index in a more apposite perspective.

6) Conversely I would suggest that over the same period NO short term freight market boom has presaged an economic boom.

7)"Caveat emptor" applies to any attempted correlation between the freight market and the international economy.

bdp1 Consulting Ltd (Barry)

I would offer a "yes, but" as a rejoinder. I look at what people can trade swaps on, which is the composite of 4 Capesize routes within the Baltic Capesize Index ( a component within the BDI ). The spot numbers have now climbed from $80K / day up to $104 K / day since the Dec pullback.

Even shipowners like to fix their ships before the Christmas Holidays. Freight traders got sucked in to a positional freight maelstrom- this caused the composite to slide down. But forward expectations were at a contango with respect to 2008. So, spot has recovered. And, so has the forward curve- swaps on the 4 route composite are trading up near $120 K for 2Q 2008, a little lower from the torpid 3Q.

Does this sound like the end of commodity markets as we know them? (that was a rhetorical question, I am obviously a believer that the shipping market has some legs for 2008).

For 2009 - 2010, the huge increase in vessel supply kicks in. That's why the forward rates are backwardated beyond 2008. Shipping supply / demand interaction. A huge number of vessels were ordered in 2H 2007. The pundits have expressed concern as to whether the supply will be delivered, but we'll save that one for another posting.

Anyway, yes freight and raw material prices must surely correlate- probably both lagging indicators. LME nickel used to be the best coincident indicator around, but I am dating myself....

Shipping markets have their own unique rhythms. Investors need to look beyond the BDI, a dangerous single point indicator at best, and see what the sentiment is of the freight traders in the forward markets. I don't think that we are done just yet.

And, be wary of tight correlations with commodity prices- as one pundit succinctly put it, "this time in the market cycle, the people ordering the Capesize bulk carriers were not the same people ordering the blast furnaces."

Al Boye

I completely agree with Rob.

Rerto Jordans

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