LONDON: Freight shipping prices have plummeted to a historic low, fueled by a long-standing problem of too many ships and lower demand from China, but experts cautioned against seeing it as a warning on the global economy.
The Baltic Dry Index (BDI), which tracks the cost of transporting dry commodities such as coal, iron ore and grain across 20 shipping routes, dropped Wednesday to 509 points, its lowest level since the creation of the index in 1985.
There have never been more commodities transported by sea, but the sector has been plagued with a surplus of ships ordered in good times, while China has put further downward pressure on rates.
The index used to be seen as a reliable indicator of global economic health or looming crisis, but the gauge has lost its edge in recent years.
“The BDI adds little to what we already know about global commodity markets from other indicators, and it is a poor guide to the overall health of the world economy,” said Julian Jessop, analyst at Capital Economics.
Marc Pauchet, an analyst at shipbroking company Braemar ACM, said: “The combination of increased speculative investments in the commodities market and an oversupply of ships has thrown the indicator off in recent years.”
The BDI is now simply a reflection of the balance of supply and demand for ships carrying dry bulk.
“The key point is that demand for cargo ships has recovered since 2009, but it has failed to catch up with the growth in supply,” said Jessop.
Lessons not learned
The shipping industry has long suffered from the blight of ships ordered when times are good and delivered when they are no longer needed.
The BDI peaked at 11,793 in May 2008 and confident owners ordered more ships to cope with robust demand—oblivious of the coming global economic crisis.
Since then, the market has been hoping for a recovery that has been slow to materialize.
And every tentative upturn has led to increased orders from shipyards, mainly in China and Japan, perpetuating the problem.
“The market does not learn,” said George Kalogeropoulos, commercial and chartering director at SafBulk—although he said the extent of the BDI decline this time was surprising.
The fourth quarter of 2014 was especially bad for business, a period supposed to be the strongest in the year for the dry bulk sector.
This was compounded by a late Chinese New Year in February, and the traditionally quiet period preceding it.
China is the world’s second biggest economy after the United States and the largest consumer of coal and iron ore, making the shipping industry highly dependent on Chinese demand.
But the Asian powerhouse’s economy is slowing down. In 2014, it grew at 7.4 percent, the weakest rate for 24 years.
And Beijing’s removal of an export tax rebate last month is likely to continue to depress Chinese demand for iron ore, according to Pauchet.
“Chinese steel mills had been taking advantage of the export tax rebate to sell their production to neighboring countries,” he said.
“But the re-introduction of the export tax in January weighed on demand for Chinese steel, translating in a drop in iron ore imports.”
Prospects for coal are no better. Chinese imports fell sharply in 2014 owing to the increased use of hydropower, according to Braemar ACM.
And this year, the completion of nuclear power plants should further reduce Chinese demand for coal.