Shipping Rates Tumble, Flashing Warning For Global Trade

Shipping Rates Tumble, Flashing Warning For Global Trade

about 4 years ago2 mins

The cost of shipping goods around the world is tumbling, suggesting the coronavirus outbreak is putting a brake on Chinese imports and exports – and global trade as a whole.

What does this mean?

The benchmark measure of the cost of transporting bulky goods like iron ore and coal – the Baltic Dry Index (you know the one) – has dropped by about 80% since September. The gauge found fame back in 2008 when an even bigger plunge accompanied the global financial crisis.

Baltic Dry takes a dunking (Source: Koyfin)
Baltic Dry takes a dunking (Source: Koyfin)

Shipping rates, which are no stranger to sudden swings in prices, have never returned to those feverish pre-crisis days. That’s because there’s been a massive glut of newly built ships hitting the high seas 🍾

Why should I care?

Whenever the Baltic Dry makes a big move lower, you’ll find market commentators suggesting it’s a warning sign of a wider economic slowdown. It’s not unreasonable, after all, to conclude that declining transport demand is a bad omen for the economy.

Attracting particular attention this time is the “capesize index”: part of the Baltic Dry that tracks the cost of shipping goods in the largest vessels, and which just fell below zero for the first time ever. (A “capesize” ship is one that’s forced to travel via the Cape of Good Hope or Cape Horn as it’s too big to fit through the Panama or Suez canals).

Before freaking out too much, however, bear in mind that the Baltic Dry is an incredibly volatile index. It’s not exactly likely to take China’s viral outbreak sitting down when it affects the world’s second-largest economy.

Take solace from private equity giant Blackstone, which last week reiterated its opinion that a recession is unlikely. If they’re right, we might yet see a rebound in the Baltic Dry – and shares of shipping companies.

Shipping stocks and the Baltic Dry often move together (Source: Koyfin)
Shipping stocks and the Baltic Dry often move together (Source: Koyfin)
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