Drop in Shipping Indicates Slowing Global Economy

Jun.30.10 | About: Guggenheim Shipping (SEA)

The Baltic Dry Index, a measure of international shipping rates for dry bulk cargoes, hit new lows for the year on Monday June 28th. The index has dropped sharply in the last month and is indicating that global manufacturing activity is experiencing a major slowdown.

Shipping rates are very dependent on market demand (it takes a long time to build a large ship and to increase the supply of shipping capacity) and will rise and fall sharply in response to it. The Baltic Dry Index is a daily record of costs to ship goods such as building materials, coal, metallic ores and grains. Oil and natural gas are not included in the index. Many of the products that are included are used as inputs somewhere in the manufacturing pipeline.

Shipping activity for 2010 peaked so far on May 26th when the Baltic Dry Index reached 4209. Yesterday, a little more than one month later, the index stood at 2447 - a 42% drop. Until this week, the low for the year had been 2501 on January 25th. Not only is shipping at a new low for 2010, but the high for this year was less than the high reached on November 23, 2009. On that date the index was 4423 and as of now that was the post Credit Crisis peak. This compares to the all-time high of 11,793. It looks like we won't be reaching that level again anytime soon.

Lower highs and lower lows paint a picture of a weakening trend for shipping. The next key level for investors to watch is 2163. This was the low in activity on September 24, 2009. If the index breaks below this, returns to the incredibly lackluster levels in the spring of 2009 are possible. It is not likely though that we will be returning to the all-time low level of 663 from December 5, 2008. At that time, global economic activity was literally frozen and was at a severe depression level. Even in a fairly steep double dip recession, there should be more shipping activity than that.

Disclosure: None