It is NOT a measure of how much stuff is being shipped. Rather it is a measure of the price of shipping stuff. Price, as always, is determined by supply and demand. "Supply" in this case is the number of ships available to move stuff. "Demand" is the amount of stuff people want to move. At present, the fleet of dry cargo ships is somewhat overbuilt (particularly by Chinese shipyards). And demand is somewhat down due to the slowing of the growth of the economy in China and other countries. A modest oversupply of ships coupled with a modest economic slowdown leads to a big drop in the index. Because ships are long term investments, it takes awhile before enough of the older ships in the world fleet are retired, so the supply side remains too big for a fairly long time, and hence the index stays low for a relatively long time.
Well said.
Forbes has a nice article that explains this:
Explaining The Baltic Dry Index Plunge: It's Supply, Not Demand.
What the Baltic Dry is telling us is not that global trade has collapsed. Rather, that global trade isn’t growing as fast as the supply of ships capable of performing that global trade. Thus the price of trading has fallen.
Thus we don’t need to take this as an indication to batten down the hatches (unless we’re unfortunate enough to be ship owners) nor that the global economy is about to fall over. We don’t even need a public policy to deal with it. Low freight rates are great for the rest of us and the problem itself within the industry will be self solving. Some people will go bust, older ships will be scrapped and demand and supply will move closer together and the price will change again. This is precisely the sort of problem that the market unadorned deals with perfectly well.
In a page I linked earlier says:
In a normal market the rational decision would be to remove loss-making ships, but this is anything but normal. World shipping is drowning in debt. Ship owners who have financed their fleets with 60 per cent debt and 40 per cent equity have seen that equity become worthless, Kidwell says. The banks that provided the debt won't pull the plug because they would be forced to recognise the losses. They accept that they won't have debt service, and must wait and see if the owner can survive until the market recovers.
"What is damaging shipping is a zombie fleet, which accepts freight at maverick prices just to keep going," Kidwell says. A zombie ship is one that can make some contribution to interest payments on its debts, but has no hope of repaying the capital. The situation might be about to get a lot worse. The calculation of loan repayments and interest depend on the expected value of a ship at the end of the loan.
“Ship owners are facing the tough decision of whether to just drop anchor and hope it gets better,” added Mr Penn.
Many trips are now loss-making as the cost of running a Capesize vessel, which at up to 340m is equivalent of almost four football fields in length, can run to $7,500 dollars a day.
The scrap value of ships has also plummeted as China pumps new steel onto world markets.
Sixty percent of the cost of a new ship is owed to the banks for ships that may not be worth its weight in steel (if we factor in the cost to scrap the ships). Therefore, shipping companies have to operate at a loss just to contribute to the interest.
Low freight rates are not great for us if the system we depend on can't sustain its self.
Jeanette Isabelle
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