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The Decline in the BDI Doesn’t Mean Much…

June 15th, 2010 Michael McDonough

The Baltic Dry Index (BDI) has fallen 28% from its recent high on May 26th, indicating to some weakness in the global economy.  The BDI tracks the prices of bulk carriers which are the life-blood of global trade carrying everything from iron ore to grain.  While the 28% decline may seem ominous, the BDI is being influenced by two outside factors that have very little to do with global economic health.  The first factor is that during shipping’s boom period, prior to the recession, a record amount of new ships were ordered that are only now being delivered creating a supply glut in the sector, while demand remains tepid at best.  Secondly, China’s unprecedented stimulus package, stoking the country’s demand for raw materials through new lending and infrastructure projects, gave the country enormous sway over the index as they were receiving the vast majority of dry bulk goods.  Further tightening in China without substantial offsetting demand increments from the remainder of the world—which are returning, but at a gradual pace—along with an armada of vessels coming online over the next several month will likely place continued pressure on the BDI, but not necessarily indicate a slowdown in the global economy. 

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