What Shipping Prices Say About Global Economic Recovery

According to some business analysts in the Far East, who track shipping indicators such as the Baltic Dry Index (BDI), and container shipping prices, A stabilizing market in ocean transport prices may be indicative of a fully recovered global economy. One shipping consultant in New Delhi, Abishek Tandon, commented on the industry’s outlook, “The container business as measured by global port throughput grew by almost 15 per cent in 2010. However, the growth rate is expected to taper down in 2011-12 and we expect that it might not be a double-digit growth and the figure could hover around eight per cent or nine per cent….The global economy seems to have come out of that deep recession and international trade seems to have recovered. However, the new normal growth might be different – lower – compared to normal growth perceived before that period.”

So is a healthy global recovery tantamount to a “new normal?” Are expectations for continued global growth at the pace of the late 90s or mid 2000s unrealistic? Again data from the shipping industry, especially the BDI often considered to be a leading indicator of future economic activity, points to the validity of that conclusion. The BDI is (a leading indicator) because orders for raw materials and goods that are shipped (BDI accounts for these prices) must be placed well in advance by companies.

The BDI reached its highest level ever in May 2008, with the index surpassing the 11,000 mark. The years from 2002-2008 were notorious for the outrageous profits shipping companies were making in transporting goods and raw materials (avg. $100,000 profit per ship, per day), so the price index may have been unreasonably inflated to begin with. Reality came knocking at the door after the financial crisis struck, and by the Fall of 2009 the index had sunk below the 2,000 mark. The BDI is currently hovering around 1,500. So how much can we extrapolate from a stabilizing and cheap BDI? Does this mean that shipping is primed to take its place as a major conduit of growth in the global recovery?

Faisal al Yaifi, a columnist for The National, concludes (on the prospect of a full global recovery), “This is the chief problem with a measure like the BDI. Although it can predict the general trajectory, it can only do so when seen from a wide perspective. In between the trajectory are too many dips and falls, too many brief peaks, too many other factors. But since shipping does track the global economy closely…predicting the world economy through shipping is a bit like that – it can give you a sense of the final destination, but not the twists and turns that might occur before you get there.”