Canada Markets

The jury may be out these days debating the meaning or value of the Baltic Dry Index (BDI), but one thing for sure is that shippers of bulk product on ocean-going vessels, such as grain, are benefitting from attractive levels.

The BDI replaced the Baltic Freight Index that was started on Jan. 4, 1985 at an index of 1000. The index is a weighted average of rates of vessels used to move bulk commodities --Capesize, Panamax, Handysize and Supramax vessels, which are used to move grains but also other commodities, such as iron ore, coal and building materials. This index is created from transactions on London's Baltic Exchange.

This index has long been watched by such groups as economists and investors as a measure of an economy's strength and an indication of commodity demand. The BDI has been viewed as a leading indicator, as it predicts future economic activity. An example would be the use of BDI trends to measure China's imports of such raw materials as iron ore and cement in order to make forecasts surrounding economic activity and growth.

Unlike commodity markets which can be pushed higher or lower due to speculation, the BDI is said to be free of all speculation as it involves the movement of actual product.

The current debate is surrounding the validity of the index as a forecasting tool. At the time of the record high in the BDI in 2008, many ships were on the drawing board to be built. The actual capacity for ships in the BDI class increased by 10% in the last half of 2011, with reports suggesting an increase in capacity of 7% in 2012. The capacity increase for the Panamax class, a common grain carrier, increased by 13% in 2012.

The challenge is now to decipher whether the low BDI, with a recent close of 751 as seen on the attached chart, is due to weak economies and sluggish demand for commodities, or is it a situation of over-capacity or a glut of shipping vessels? Opinions exist on both sides of the argument.

While the recent BDI has increased only 2.32% in the last year, its 2013 calendar year-to-date increase is 7.44%. Iron ore shipments were a driver earlier in the year, while the Panamax class rate achieved its largest weekly gain in a year as vessels are aggressively booked to move new crop grain from Brazilian ports.

Bloomberg reports that Panamax rates have popped 11% recently, to $5,748 United States dollars per day. This rate still remains below the average operating cost for the Panamax vessels which is suggested to be $6,606 U.S. dollars/day, which doesn't include fuel costs. Panamax vessels are recording the lowest earnings in the past 15 years as a result of the situation, while the overall shipping fleet is set to expand even further over the first half of this year.

Panamax rates bear a seasonal trend which sees rates move higher in the spring months, as new crop South American product becomes available. Recent reports suggest there are approximately 135 ships that are currently in position to be loaded at Brazilian ports, with a waiting time of 35 days in order to get loaded, which also involves a fight between commodities for priority handling and shipping.

The attached chart shows the trend of the BDI over the past few years. The index high in 2008 reached a record 11,793, while 25 year lows of 647 were reached in February 2012. Further time and study will be required to determine the correlation between the BDI and global economic growth, although I am on the side of the argument that believes that supply and demand for shipping capacity will ultimately impact price, or in this case, shipping rates.

Regardless of the correct answer, Canadian farmers are benefiting from lower global freight rates which increase our competitiveness in export markets and may for some time to come.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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