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FT.com / Investor's notebook - View of the Day: Baltic fall reflects China demand

View of the Day: Baltic fall reflects China demand

By James Lord

Published: September 24 2009 17:03 | Last updated: September 24 2009 17:03

The recent sharp fall in the Baltic Dry Index is in part due to an increase in shipping capacity, but primarily reflects waning demand for commodities – especially in China, says James Lord at Capital Economics.

The BDI, which has almost halved since the start of June, reflects the cost of hiring a bulk cargo ship and as such is often seen as an indicator of the health of the global economy.

“But we think the BDI’s drop is due to conditions specific to the shipping industry and to China’s reduced commodity stockpiling,” Mr Lord says.

He notes that orders for new ships rose sharply during the boom years for the global economy – and as it takes up to two years to build these craft, many have only recently become available for lease.

“However, the supply of new ships began to rise in January – well before the recent correction in shipping costs,” he says. “We therefore believe the main driver of the recent BDI decline has been falling Chinese stockpiling of commodities.”

Mr Lord says the global upswing may continue to underpin commodity prices for a while even though Chinese demand has tapered off. “However, commodity markets have already priced in a strong recovery. We expect global growth to slow in the second half of 2010 – and as such we see commodity prices falling next year.

“Indeed, the recent fall in the BDI may be an early warning sign.”

Copyright The Financial Times Limited 2009.

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