Indices that track the cost of moving oil and bulk goods have posted big gains over the past few weeks. The Baltic Dry Index, the most-widely followed gauge of prices to ship dry goods like coal and iron ore, has almost doubled since the start of September. The Baltic Dirty Tanker Index, its crude oil counterpart, is up 50% this month.
The global economy, and the outlook for next year, haven’t greatly improved in that time. Instead, a series of localized crises boosted demand for transportation. Indications in August that Beijing may ease up on the property sector gave the impression that iron ore may rebound, which boosted dry bulk shipping, but those hopes didn’t last and rates should have fallen. Instead the Baltic Dry Index continued to rise because of a series of bad news.
Droughts across the world have been a major factor. “The low rainy season has benefited the seaborne trade of iron ore,” Athens-based Xclusive Shipbrokers wrote earlier this month. That’s because rain makes iron ore, a dry commodity, absorb water, which becomes heavier and more dangerous to ship. Dry weather has the opposite effect. Compounding the problem, low water levels in the Mississippi River and the Panama Canal have reduced traffic through both waterways, cutting transportation capacity and raising prices. Long waits at the Central American waterway might continue through both Christmas and Lunar New Year, the Panama Canal Administrator forecast last month.
Then there’s this month’s surprise Hamas attack in Israel, and the ensuing bombardment of Gaza. Renewed conflict in the Middle East stoked concerns over the supply of energy, chiefly oil, forcing shippers to adjust their routes. Buyers are stocking up, and they’re urgently booking oil tankers. The Baltic Dirty Tanker Index shot up.
Tracking and predicting transportation rates is a science as old as shipping itself. Knowing when prices will fall gives manufacturers and traders an edge in booking capacity, while being able to predict a rebound in trade is crucial for shipowners deciding whether to buy new vessels or lay up their existing fleet. The past five years have compressed decades of boom-bust shipping cycles, offering a glimpse of the industry’s volatility. Rates across all types of shipping, including container, bulk and oil, were weakening well before Covid-19 threw the world into disarray. Yet economic indicators before the pandemic struck remained relatively strong. This sounds counterintuitive. A strong global economy and increased trade ought to boost demand for transport, and drive prices up. It doesn’t. Sung Man Jung, who analyzed data for his Master’s thesis at the World Maritime University, looked at the periods before, during, and after the 2008 financial crisis to isolate the factors affecting the Baltic Dry Index. He found that it was the supply of vessels, not a drop in gross domestic product or trade, that impacted BDI following the meltdown. A strong economy leading up to that one-time shock spurred ship owners to keep buying vessels. More capacity to move dry bulk loads, measured in dead-weight tons, was added than retired. As a result, supply climbed 34% between 2007 and 2010, according to a Bloomberg Opinion analysis of data compiled by the US Department of Agriculture. The subsequent decade, driven by chronically low interest rates and a booming Chinese economy, boosted trade, but the BDI remained lackluster. Commodity prices, the most direct indicator of demand, has very little impact on shipping rates, Jung found.
What drives prices upward is short-term unsustainable shocks, and recent history has shown this to be true. Russia’s invasion of Ukraine last year caused the BDI to jump. Ukraine is a major grain producer and that war raised concerns about supply. Most other increases in shipping indices have been due to short-term factors. In late 2019, the maritime industry laid up large swathes of its fleet in order to fit air scrubbers to meet new rules on sulfur oxide emissions. Indices spiked, and then plummeted when those vessels went back into service.
With the global economic outlook worsening, as evidenced by the International Monetary Fund’s recent downgrade, there’s no reason to hope for a rebound in trade and shipping prices. But this may not matter. Capacity is a bigger factor, and prolonged economic weakness coupled with an aging fleet and new environmental rules, will likely to spur ship owners to scuttle more vessels. Those betting on a sustained recovery in marine transport rates need to hold on a while longer.
