A steep drop in the price of shipping freight rates could suggest the global economy is in for a rough future.
The Baltic Dry Index (BDI), if you’re not familiar, is a key indicator of global economic health. It tracks the price of shipping major materials, like iron ore, by sea, assessing specific trade routes.
The BDI’s performance in 2015 has left many observers puzzled. Despite falling commodity prices, the index has had a resilient 2015, sitting around the 1,100 point mark. In fact the BDI has doubled over the last couple of months. And it’s done so even while commodity prices, and Chinese asset bubbles, were bursting. China’s slowing demand should have sent freight rates down.
Shipping prices, for the most part, aren’t readjusting to lower demand. At least, that was the case until last week.
Usually, high prices are as a result of rising commodity demand. Alternatively, a tighter transportation market could also explain higher prices. But neither of these two things offer a sound argument for why the BDI is trending well.
How is this possible then?
The answer, it seems, may have to do with speculators. Specifically, investors have been betting on a rebound in shipping this year. That served to push up the index, defying market expectations. But with no recovery in sight, the index could be in line for a major crash.
‘Shipping freight rates for transporting containers from ports in Asia to Northern Europe dropped 22.8 per cent to $400 per 20-foot container (TEU) in the week ended last Friday, data from the Shanghai Containerized Freight Index showed
‘Freight rates on the world’s busiest shipping route have tanked this year due to overcapacity in available vessels and sluggish demand for transported goods. Rates generally deemed profitable for shipping companies on the route are at about US$800-US$1,000 per TEU.
‘It was the third consecutive week of falling freight rates on the world’s busiest route. Container freight rates have so far increased in 5 weeks this year but fallen in 23 weeks.
‘In the week to Friday, container freight rates fell 24 percent from Asia to ports in the Mediterranean, fell 4.4 per cent to ports on the US West Coast and were down 3.7 per cent to ports on the US East Coast’.
The concern for the global economy now is whether this will continue for the rest of the year. If it does, it would lead to a marked slowdown in the volume of global shipping trade.
The last time world trade volume tanked was during the global financial crisis of 2007–2009.
Granted, total trade volumes are still higher today than at their peak prior to the GFC. But with three consecutive months of declining trade, the signs are worrying.
With economy activity weakening, a global recession is looming on the horizon.
Contributor, The Daily Reckoning
PS: You don’t need trade volume data to predict the future of the Aussie economy. The Daily Reckoning’s Greg Canavan warns the economy is heading for a recession.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why GDP growth rates will fall into negative territory.
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