Wry & Dry

High and Baltic Dry

W&D laughs sometimes at the lengths that some analysts will go to to find/ create an indicator that will predict the economic future.  One favoured indicator is the Baltic Dry Index ('BDI') [2].  

This index came into popularity leading up to the GFC.  It peaked in May 2008 and six months later had plummeted by 94%.  Hmm, surely the world's trade in commodities hadn't fallen by that much.  Well, in fact, it hadn't.  What had happened was the price of shipping space for commodities had.

And that is where the misunderstanding was.  And is.  Only earlier this week did W&D receive a weighty email on the critical importance of the latest rally in the BDI.  Meaningless, W&D snorts.

Let W&D explain.  The BDI does not measure the volume of dry bulk carrier space (i.e. that used for coal, iron ore, grain, etc) available.  It measures the demand for capacity versus supply.  That is, the price.

The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and the cost of laying up a ship is too high to take it out of trade for short intervals, the way W&D's wife might park her car safely over the harsh Melbourne winter.

So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.  For example "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..." [3] 

In other words, when Nick-the-Greek-shipping-tycoon launches two new Panamax ships [4] in response to increasing world trade, the BDI will fall as prices fall.  But the volume of world trade has increased.

Summary: when your broker/ colleague/ taxi-driver tries to sell you the economic news of the Baltic Dry Index, plug in your Beats.

-       Anthony Starkins

[1]  Originally probably Virgil's Eclogues: "The wolf is fatal in the fold". And anapaestically captured in Byron's The Destruction of Sennacherib: "The Assyrian came down like a wolf on the fold/ And his cohorts were gleaming in purple and gold/ And the sheen of their spears was like stars on a sea/ When the blue wave rolls nightly on deep Galilee".  

Byron's poem was very popular in Victorian England, when also the first Australian cricket team toured England and the strong MCC (i.e. England) team, including the legendary W G Grace, were soundly beaten.  And the satirical magazine Punch produced: "The Australians came down like of wolf on the fold/ The Marylebone cracks for a trifle were bowled/ Our Grace before dinner was very soon done/ And Grace after dinner did not get a run. 

Fold = flock.  Cracks = best.  Dinner in those days was lunch.  'WG' made 4 runs before lunch and a duck after lunch.

[2]  The BDI is published by the Baltic Exchange, which is located in London.  The 'Baltic' terminology comes from its origins as a meeting place in the Virginia and Baltick Coffee House, in Threadneedle Street, London.  In much the same way that Lloyds (the insurance organisation) was founded in Lloyd's Coffee House.  The Baltic Exchange has over 600 member companies and encompasses most of the world's shipping interests.

W&D Bonus:  In 1992 the then home of the Baltic Exchange was bombed by the IRA, killing three people and injuring 91.  The devastation was so great that the building was eventually demolished and the site now is the home to probably the ugliest modern building in the world, 'the Gherkin'. 

[3]  The Economist 22-Apr-15

[4]  A Panamax vessel is one that can fit through the Panama Canal.  And simply, hence is a question of beam (width), length, draft (depth) and air draft (distance from waterline to highest point of the vessel).