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WSJ: Baltic Drying Up as a Gauge?

by Art Patnaude and Neena Rai
Wednesday, March 3, 2010

Armada of new ships sinks accuracy of the index as measure of global health

LONDON -- Uncertainty over how many new ships will be built this year is expected to marginalize a popular measure of the global economy's health -- the Baltic Dry Index.

The index, a measure of shipping costs, gained importance over the last decade as a key gauge not just for the shipping industry but the global economy. Due to the shipping industry's stable supply structure, the index was touted as a good proxy for overall demand for raw materials, the basic building blocks of an economy.

But with an unusually large number of ships scheduled to come into operation in 2010, the index no longer presents such a straightforward view of raw-material demand, and hence economic growth.

The Baltic Dry Index "will be less responsive to shifts in demand as the oversupply of vessels becomes more pronounced," said Plamen Natzkoff, dry bulk and freight strategist at Citigroup in London. While the index "will still reflect the supply-demand balance in the freight market," its worthiness as a wider-ranging indicator will be limited, he said.

The index's publisher defends it. "There are two elements to the BDI: demand and supply. When the supply of shipping is fairly stable, demand represents a good pointer to activity in primary industry," said Jeremy Penn, CEO of the Baltic Exchange. "[The BDI] is a good indicator of dry bulk rates in the market -- we have never made great claims for it to be more than that."

The Baltic index assesses the cost for moving bulk cargoes on major shipping routes via the four largest dry-vessel classes. It is released five days a week, and gives a comparable level of the cost of moving bulk cargoes -- mostly iron ore, coal and grains.

Historically, dry-bulk shipping costs have been able to serve as a proxy for demand because ship supply has been roughly constant.

In May 2008, the index rose to a record high of 11793 as industrialized nations demanded fodder for booming economies. But by December, as demand for bulk goods dried up, the index had slid to 663. Tuesday, the index was at 2792.




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