Baltic Dry Index fall is mainly due to oil, commodity price slump
February 10, 2015 - 3:15PM
Max Mason
Max Mason is a business reporter focusing on financial markets.
The Baltic Dry Index, a measure of a number of shipping routes and the prices for transporting major bulk commodities, has fallen 29.2 per cent in 2015. Photo: Sharon Smith
The costs of shipping bulk commodities have fallen to a near three-decade low, raising concerns about global economic growth. However, there are a number of elements at play and analysts have warned about reading too much into the slump.
The Baltic Dry Index, a measure of a number of shipping routes and the prices for transporting major bulk commodities, has fallen 29.2 per cent in 2015 to 554 points – the lowest level since 1986. Over the past 12 months it has dropped close to 50 per cent.
The World Bank recently downgraded global growth by 20 basis points to 3 per cent for 2015. So it would appear that a drop in the BDI would match the faltering growth narrative in the World Bank's forecasts.
But there are numerous moving parts which impact the BDI, not least of all the plummeting oil price.
"With the oil price effectively halving, freight rates all around the world are coming down," UBS commodity analyst Daniel Morgan said.
This year, oil is effectively flat, but it has had massive fluctuations of more than 20 per cent in just a matter of days. In the past 12 months, Brent crude oil has fallen 44.2 per cent to $US57.64.
"That's your big variable cost in freight. You're paying for the bunker fuel to transport the vessel from one place to another."
The freight cost of shipping iron ore from Western Australia to China for much of 2014 was around $US8 to $US10 dollars per tonne; that cost is now around $US4 to $US5 per tonne, Mr Morgan said. Shipping iron ore from Brazil to China has halved from $US20 per tonne to around $US10 per tonne in the same period.
Over the longer term as commodity prices and demand, largely from China, surged post-global financial crisis, more ships were commissioned and over time have come online, reducing the cost of transportation.
"It the past it has correlated well with that industrial activity but it has broken down a bit in recent years because of its own supply-demand fundamentals," Australia and New Zealand Banking Group senior commodities analyst Daniel Hynes said.
"We've seen an oversupply of capacity which has impacted prices rather than demand of the raw materials it's carrying being the driver."
While it is monitored, the BDI has lost some of its relevance in terms of predicting the demand for bulk commodities, Mr Hynes said.
The falling cost of shipping is also impacting the price of iron ore, which overnight on Monday fell to a new record low of $US61.20 per tonne. However, iron ore has only had a benchmark index price since 2009. Iron ore is another commodity that has dropped close to 50 per cent in the past 12 months, thanks a large miners such as BHP Billiton, Rio Tinto and Brazil's Vale flooding the market with more supply.
"It just adds to the supply issues iron ore is seeing because it's significantly lower shipping costs. When combined with the falling Aussie dollar, it's certainly making a lot of supply, which might have been borderline, a little bit more profitable now," Mr Hynes said.
Cheers,
Samson
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