While the Baltic Dry Index (BDI) has been sharply down, the container rates for finished goods have been rising. Which of the two is a more reliable indicator of trade?

The BDI has long been considered as the most important shipping index as well as a global economic indicator. Since the index reflects the actual prices at which ships are being hired, it is supposed to be one of the most reliable real-time indicators of global trade. However, this index has been completely out of sync with the movement in rates for shipping's container segment recently. While the BDI has fallen sharply over the past two months, the index of container shipping rates has been stable and even rising.

The BDI fell to 1,700 points on 15th July, from a high of 4,209 on 26th May. Its all-time high was 11,689 on 5 June 2008. Container shipping rates, on the other hand, have been on a steady rise mainly because there has been a steady demand for containers. According to an international report, from a peak of more than 240 ships available in the container segment in March 2009, the availability has sharply fallen to 44 carrier-operated ships.

Container shipping from Asia to Europe rose 21% year-over-year in May 2010. Shipments from Europe were down 6.3%. Traffic from Europe to North America rose 15.8% in May after a 25.7% rise in April. From North America to Europe, traffic was up 13.2%, after a 14.8% growth in April. The trend in container rates is exactly the opposite of what the BDI shows.

The BDI has been a very volatile indicator of freight movement for the past few months because it has got completely linked to the Chinese economy, especially China's imports of iron ore. Another important factor is the BDI is highly dominated by the Capesize Index. The current fall in the BDI was mainly due to a fall in the Capesize Index. The Panamax and Supramax indices reported marginal falls compared to the Capesize Index.

The slump in the dry bulk segment has been mainly attributed to the slowdown in China's steel production. On the other hand, improvement in the container segment is due to the growing intra-Asian trade and to a large-scale cancellation of orders to build new containers during the 2008-09 crisis.

"There has been a considerable recovery in intra-Asian trade, leading to a significant growth in container volumes. The rate of idle tonnage has also reduced significantly," said Vinay Kshirsagar, CFO, Shreyas Shipping and Logistics Ltd.

Commenting on the importance of the two indicators, he said, "Both the BDI and the movement in the container shipping rates are important. However, the BDI is much more volatile due to its sensitivity to the Capesize Index and dependence on China's trade. Even a change in China's government policy has an effect on the BDI. On the other hand, container rates are steadier as they reflect the diversified nature of the underlying demand."

S Hajara, chairman and managing director, Shipping Corporation of India (SCI), echoes Mr Kshirsagar's view on the BDI. "The BDI got a boost post the recession period, from the Chinese boom, which is now again on a downturn, due to the slowdown in China's steel production. The container segment on the other hand has done remarkably well," he said. "I don't expect any major revival in the BDI before 2011, but it should not go really low," he added.

Reflecting the improved business volumes, the German container shipper TUI AG recently raised its outlook for 2010, and Taiwan's Evergreen Group has ordered 10 new container ships. Danish shipper Maersk, the world's largest container shipper, has raised its 2010 earnings forecast, predicting that it would earn more than the $3.5 billion in profit which it earned in 2008.

PK Agarwal, chief general manager, western region, Container Corporation of India, India's largest container company, also agrees that there has been a steady growth in container volumes. He also pointed out to an increasing shift from break-bulk to containers. "In the past two to three years, a shift from break-bulk to container shipments for bulk commodities like fertilisers, iron ore and food-grains has also been witnessed. This also could be one of the many reasons for an increase in container volumes," he said.

So, should one rely on the highly lopsided BDI as an indicator of shipping trends or is it time to ignore it and look at container shipment rates as a more reliable indicator? We will keep a watch on this issue as it evolves.
— Moneylife Digital Team