Economists and traders use several ways to look at the commodities markets. One, the Baltic Dry Index, is a daily tab of how much it costs to move raw materials by sea. Not containers, just bulk things like iron ore, steel and coal. And just like those commodity markets, this index ended the year down, dramatically.
Paul Bingham, vice president of the Economic Development Research Group, explained the index is a simple supply and demand equation.
“It is a composite of the actual ship charter contract to carry a cargo from one port to another in the world across a variety of vessel sizes carrying these dry bulk commodities,” he said.
So, if nobody else is shipping iron ore today and a company has a load it needs to get from Brazil to China, it’s not going to cost as much.
“You’ve got too much capacity chasing too little cargo,” Bingham said. “The dry bulk vessel fleet is too big for the demand that is out there in terms of global trade for those commodities.”
Basil Karatzas, a shipping consultant in New York, said he monitors the index intently. He said these numbers are awful news for shipping companies, but good news for mining companies.
“Of course, you know you’re getting killed on the commodities side of the business,” he said. “But at least you’re saving something on the shipping expense.”
Jean-Paul Rodrigue, author of “The Geography of Transport Systems” and professor of geography at Hofstra University, said that when commodities are flying off the shelf, shipbuilders make ships. Or, at least they start to.
“The problem is, ships take two years to be built and when they enter the market,” he said. “And suddenly they enter the market where conditions could be different. That’s currently what we’re seeing right now.”
They call it a forward-looking indicator because what’s on a ship today will be part of other economic activity later – manufacturing or retail to name a couple. So, if demand for raw goods increases, this index will rise. At least that’s what shipping companies are hoping in 2016.