Despite its name, the Baltic Dry Index (BDI) isn’t just about Scandinavia. It’s published by London’s Baltic Exchange, the global marketplace for buying and selling shipping contracts.

The BDI measures the demand for space on so-called ‘dry bulk carriers’, which carry cargoes such as coal, grain, timber, steel and iron ore. That makes it a ‘leading’ economic indicator. Manufacturers of course need to buy in supplies of raw materials before they can churn out finished products. So a pick-up in industrial activity will show up in the BDI, as producers stock up on raw materials, before it appears in the official production statistics.

And as the supply of shipping capacity tends to stay relatively unchanged over the short-term – it takes up to two years to build a new ship, and most carrier operators are reluctant to scrap their vessels unless they have to – it doesn’t take a big increase in demand for transport space to push the BDI higher.

This is exactly what we’ve been seeing recently. Last year, as the global recession took hold, the index fell some 90% as trade dried up almost overnight. But in 2009, with the Chinese buying huge quantities of industrial commodities and metals prices rising fast – the S&P GCSI global commodity index is up 37% this year – the BDI has taken off. From mid-April until the middle of last week, it soared 180%.
After taking off earlier this year, it has now run aground

That’s got the economic optimists cheering from the top of the mast that global trade, and thus economic growth, was staging a major comeback. Supposedly the end of the recession was in sight. But on the 3 June, the BDI ran aground. It has since lost 20% in a week.

So what’s gone wrong?

All that buying from China may have got the shipbrokers excited, but the Chinese were being very smart. They were cashing in on massive drops in the prices of many commodities over the previous year or so, and have stockpiled the stuff. For example, they picked up record amounts of iron ore – which had halved in price – between February and April, loading up 50m tonnes in the latter month alone.

They’ve also snapped up loads of aluminium, copper, nickel, tin, zinc… and lashings of crude oil too. And there’s no doubt these stockpiles will prove very handy one day.

But not yet. Indeed right now, the Chinese have binge bought so much, they’ve almost bitten off more than they can chew. They’re running out of room to store their swag. “At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing”, says Keith Bradshaw in the New York Times. Here’s the key bit. “Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak”.

In a nutshell, that economic recovery the bulls think they can see just isn’t happening at the moment. And as the Chinese stop stockpiling, commodity prices will drop again and demand for ships will sink. That’s what the BDI is now telling us.

Original Source