Shipping costs recovering but are still considered cheap

Remember the Baltic Dry Index?

A dozen years ago it seemed every market analyst presentation had a slide or two showing how the BDI was soaring.

The BDI and related indexes show the relative cost of ocean freight on various size ships.

In the early 2000s, the BDI became a stand-in for the pace of global trade. It became something of a thermometer measuring the health of the global economy. A feverish BDI was a good sign for commodity demand; a cooling BDI was bad.

However, the world’s fleets were not ready for the boom in commodity demand from China and other fast growing Asian countries in the early part of this century.

The BDI began to soar.

With ocean freight becoming expensive, proximity to markets became a bigger issue for the world’s grain exporters. Australian exporters were closer to China, giving them a competitive advantage over Canada.

And anytime a transportation snag caused ships to back up at port, it meant high demurrage costs passed on to farmers.

The BDI peaked near 12,000 in 2008. The high profits in the industry caused fleet owners to order vast quantities of new ships.

But then the BDI collapsed when the rest of the rest of the commodity market imploded with the economic crisis in the United States.

It partly bounced back when the economic system stabilized in 2009-10 but then fell back again as the ships ordered in the good times were completed and launched, adding to freight over- capacity as China’s slowing growth led to lower global shipping demand.

The BDI remained below 2,000 for most of this decade and fell to its lowest level in early 2016, dipping to an all time low of 290.

The BDI lost its direct relationship with commodity prices because of the huge oversupply of ships, and ocean freight was a minor issue in grain markets.

However, the BDI index has been rising and recently hit the highest level since 2014 at about 1,300 points.

To give a better idea of the real world impact of the changing BDI, a spot time charter of a Panamax vessel in February 2016 fell to as low as $2,300 when the BDI was at 290, but by early this month it had recovered to $11,443.

Capacity is adjusting. Old ships are being decommissioned and demand for commodities is picking up.

Ocean freight is still cheap, but with improving fundamentals, how high could it go?

No one expects the cost to take off higher.

Global economic growth is accelerating after nine years of stagnation.

However, 2017 growth at 3.4 to 3.6 percent, up from 3.1 in 2016, is not the same as the heady levels of more than five percent seen in 2005 and 2006.

New ships are still entering service, so more old ships will have to be demolished if fleet owners hope for better operating returns.

It will likely take years before supply and demand of ocean shipping capacity becomes better aligned.

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