WSJ:

Rates for shipping iron ore, grain, coal and other commodities have fallen nearly 25% in the past six weeks, reflecting a slowdown in the movement of many raw materials around the globe. While the slowdown reflects a softening of world economic growth, the silver lining is lower transportation costs for a multitude of industries such as appliance makers, chemical producers and even bakeries, which use such materials in production processes.

Surging demand and a shortage of ships pushed freight rates to record highs in December. But since then, the Baltic Dry Index, the main indicator for commodity-freight rates, has fallen by more than half, with the slide accelerating in recent weeks. Industry officials point to a recent cutback in China’s imports, particularly of iron ore used in steel production, as the driving force behind the precipitous decline. But the downturn has broader roots. “The reason these prices are coming down is because world growth is slowing and U.S. growth is slowing,” says Nariman Behravesh, chief economist at Global Insight, an economic forecasting and consulting firm in Lexington, Mass.

Slate:

The BDI is a good leading indicator for economic growth and production. After all, it doesn’t deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron. Unlike stock and bond markets, the BDI “is totally devoid of speculative content,” says Howard Simons, an economist and columnist at TheStreet.com. People don’t book freighters unless they have cargo to move.

Because the supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert—marginal increases in demand can push the index higher quickly. And significant increases in demand can push the index sharply higher.

Commentary

The proximate cause of the 25% drop in the BDI is said to be, by the WSJ, the drop in iron ore shipments to China for steelmaking. It is hard to believe that one commodity could have such a significant impact, however. Look at the chart below. There is a big divergence between crude prices and the shipping prices. Is this a precursor to a significant fall in crude prices or are the two indices unrelated? We’ll investigate and report back.

This entry was posted on Sunday, June 12th, 2005 at 9:44 pm and is filed under business, China, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.