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Whatever The Baltic Dry Index Says, Global Trade Is Not Collapsing

Time:2016-02-24 Publisher:glafamily Num:7535

The Baltic Dry Index is now down to 293, near 50% down on a year ago and almost 40% down just so far this year. This does not though, despite a remarkable amount of panicking over it, mean that global trade has fallen off a cliff. It does not even mean that global trade has contracted at all. The important point here being, as it is about any other price in the economy, that the price is determined by the interplay of supply and demand, not just demand alone.

Actually, we need to take a further step back. The Baltic Dry Index is an index of the price of shipping (specifically, of large bulk dry cargoes like grain and iron ore, there are other similar measures for oil, containers and so on), not an indication of the volume of shipping or trade. It’s then that we have to recall that prices are about the interplay of supply and demand, not just demand itself.

And the truth is that global trade is not shrinking, despite what is happening to the price of doing that shipping of that trade. Now, if trade were shrinking that would be a problem, yes, because it would be an indication of a general slow down, possibly even recession, in the global economy. That’s not something we want to happen. But the price of shipping falling is something very different.

I’ve gone through this before, here and here, but people still just don’t seem to be quite getting it.

To look at container shipping first:

DP World has warned of difficult times ahead for global trade after growth in container volumes handled by its global network of ports slowed sharply last year despite improved activity in Europe and the United Arab Emirates.

The volume of containers handled by the operator’s ports rose 2.4% on a comparable basis to 61.7 million 20-foot units in the year to end-December from the previous year, DP World said on Monday. In 2014, DP World’s container volumes increased by 8%.

Note that: volumes are up. It’s just that growth in volumes is not all that strong, and rather lower than it has been. We saw much the same in Maersk’s results as well:

Analysts estimate the industry suffers from up to 30% overcapacity on some of the busiest ocean trade routes. Container ships move more than 95% of the world’s manufactured goods. New ship deliveries will boost capacity by 1.7 million containers, or 8.2%, while demand should top out at 2% this year, the lowest since 2009, estimates Jonathan Roach, a container analyst at London-based Braemar ACM Shipbroking.

Again, note that point: trade volumes are still increasing but more slowly than in the recent past. And note also that we’re getting the other part of the story there: the number of ships is still rising.

So, actually, what has been happening is that ship owners looked at trade volume growth in recent years and decided that they thought this would continue. So, build more lovely ships, and ever bigger ones too. Sadly for those plans, growth more recently has not been as fast. And yet those new ships are still coming to market and looking for cargoes. And thus we have a supply expansion at the same time as there’s not much of a demand expansion. The result is a falling price for shipping services.

And yes, this is also true of the Dry market as well as the container one:

Shipowners are reacting to a slump in charter rates brought on by a mix of faltering trade growth, particularly with China, and a glut of ships as vessels ordered in better times arrive on the market.
The collapse has dragged on far longer than anticipated, with average charter rates for dry bulk carriers — already at the lowest level since the Baltic Dry Index started in 1985 — declining every day so far in 2016.

Again, note that we’re not seeing a fall in trade volumes, we’re just not seeing the growth of old allied with new supply hitting the market.

Yes, the Baltic Dry Index has collapsed: but that’s a collapse in the price of shipping, not in the volume of shipping nor of global trade. Far from this being a bad sign for the global economy, it contains within it the seeds of good news. If shipping is becoming cheaper therefore it will be cheaper to trade and there will be more of it. Which is good news, because more trade makes us all richer.

And we need to recall this basic point when we think about either economics or public policy. Yes, price changes are indeed telling us something about the economy around us. But we do have to be careful that we pick up the right message. A falling price can be a symptom of increased supply just as much as it can be of reduced demand.

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