The Baltic Dry Index is one of the purest leading indicators of economic activity, since speculators are not in the market. The prices are made only by the member companies, with on the one hand those who have the cargo to be transported and on the other those who own the vessels to move the cargo. So, the BDI offers a real time glimpse at global raw material and infrastructure demand.
Just last week, daily rates for capesizes, which are typically iron-ore vessels and are being tracked, were able to again recover some lost ground. Analysts pointed out that the market detoriated dramatically as new ships entered the fleet, thus adding supply. Analysts estimated that this year, the total bulk fleet capacity would grow some 16%, which is twice the rate of demand.
In the meantime China, the biggest buyer of iron ore, put a reduction on imports of iron ore for the first time since 1998. Crude steel production in China fell to a four-month low in June as economic growth slowed to 10.3% in the second quarter, government data showed recently. To put the influence in perspective: In the first three months of this year, Chinese demand for iron ore accounted for almost 30% of all dry-bulk goods transported by the vessels.
Operating expenses for the vessels are about $ 7,000 a day (once financing is taken). Adding to the fact that capacity will grow drastically and demand is diminishing, some capesize owners will idle some vessels.
Some critics mention that the negative price development in the months June and July is being influenced by seasonal factors. Nevertheless, to reach the recent peak, the BDI has to rise more than 100%. Not even to speak of the peak of 2008: For this to happen the BDI would have to climb over 500%.