Sometimes one obscure data point can speak volumes. For instance, I haven’t heard about the Baltic Dry Index since I was a finance student decades ago. But recently I’ve started seeing it referenced in the financial press.
The index, a survey of freight costs for ocean shipping of dry commodities such as coal, iron ore and grain, is being quoted these days because it is at its lowest level since its introduction in 1985. That means shipping dry goods costs less today than it has in the last 30 years.
Why? There’s more shipping capacity than demand to ship these commodities. In the past several years, shipbuilders misjudged the path of global trade and they succumbed to the siren song of low borrowing rates. The World Bank reported last week that global trade growth has dropped to 3 percent – in line with overall global economic growth – after having expanded at 7 percent in the decade leading up to 2008. Globalization, at least in the manufacturing sector, seems to be seriously slowing down.
The other reason it has become newsworthy is that this “dry,” seemingly obscure index also sheds some light on significant trends in the global economy.
First, developing countries are now forming their own national supply chains. For instance, China not only makes dolls and shoes, but it has a network of retailers to sell them and middle-class consumers to buy them. Secondly, technology is once again disrupting the path of development. In 2014, the service sector accounted for more global growth than the manufacturing sector for the first – but certainly not the last – time in history.
All of this adds up to a bitter cocktail for shippers, and lot of idle ships to attest to the folly of misjudged global trade patterns.
My View: The good news for free market proponents like ourselves is that this imbalance will eventually correct itself. The bad news is that it will take years. These enormous ships can’t be stored in garages like cars in winter until better economic conditions emerge.
Ultimately, what the Dry Index points up is another example of how the process of global change and financial transformation defies the easy and quick solutions proposed by politicians and expected by the populace.
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