September 11, 2014

BDI- the forgotten Index

In the last month or so, the Baltic Dry Index has jumped by over 50 percent. There was a time, not all that long ago, when this would have got stockmarket analysts all excited- the BDI was seen as a bellwether for equity investors around the world for decades. The reasoning was that a mismatched demand vs supply (of tonnage) scenario heralded increased or decreased economic activity and forecast the kind of times that were coming.

Alas, no longer. The BDI- which measures shipping demand vs supply of dry cargo carriers-   jump today has gone almost unnoticed and uncommented upon. That index is no longer watched closely, it appears, except by a smallish segment of shipping folk. With good reason.

It is true that, at around 1100 levels, The BDI is a fraction of what it was in December 2008, when the bubble took it to almost 12,000 points. It would be easy to claim, therefore, that the reason nobody is excited at the 50% jump today is because present levels are hardly high, given this historical context. But the story is much more complicated than that. Importantly, also, the factors that have degraded the BDI’s ability to remain a bellwether for the global economy are here to stay. Note that stockmarket indices across the world have jumped well in advance of the BDI; markets have led the index this time, not the other way round. 

Amongst the bigger factors here is the fact that the service economy occupies a much larger space than it did when the BDI was at the peak of its relevance, and so an index that is linked to manufacturing will obviously become less connected to the overall markets. Another change lies within shipping itself, where business models have become more and more tilted towards asset plays rather than the operation of ships. The money sloshing around, thanks to the world printing more and more banknotes in response to the latest economic crisis, has found its way into shipping too, creating the sword of overtonnaging and underutilised tonnage that skews the BDI and increases volatility. The index was always somewhat volatile but was still trusted; no longer.

Today the BDI represents just one sector of shipping- and a sector that is of limited interest. The container segment of the industry has grown tremendously in the last couple of decades. The tanker market has grown and fragmented too, and some fragments- gas carriers, for example- will grow much faster than the traditional crude or product markets. Indices that reflect those segments- the HARPEX, for example, that tracks container markets- will become much more relevant to a much bigger slice of the industry.

The BDI will likely fall further in importance as a consequence of all this. It will tell us the conditions in a part of shipping, sure, but even the days when it was the main index to watch- as far as the shipping industry was concerned- are fading away. And, especially in an era where stockmarkets around the world are driven more and more by quicksilver sentiment and the supply of money rather than by fundamentals, the BDI’s halcyon bellwether days- when it indicated in advance what will happen to either to equity markets or the economy- have probably disappeared forever. 


No comments: