UN says Baltic Dry Index has lost its magic touch

The research said pundits who watch the four-route composite index for signs of industrial decline and recovery might do well to look elsewhere, because the numbers have lost touch with the industrial reality.
According to the Geneva-based United Nations Conference on Trade and Development (Unctad), the index has in fact been out of kilter with industrial production for the past six years.
Despite its following in the mainstream press and a fan base said to include Alan Greenspan, the former chairman of the US Federal Reserve, the index is no longer an indicator of the real economy because it reflects tonnage over-supply as much as demand for raw materials, Unctad said.
Volatility, which has increased substantially, has also made a wider interpretation of the numbers less meaningful, Unctad said in its newsletter.
“Observing the development of the BDI and its increased volatility over recent years, it is perhaps no longer the excellent indicator that it was during the period 1985–2002,” the newsletter said.
“The BDI as a compendium of charter rates reflects not only changes in demand for raw materials but also changes in the supply of shipping capacity. This contributes to the fluctuations of the BDI and thus reduces the usefulness of the BDI as a ‘leading indicator’ for industrial production.”
The index reflects shipping’s notorious boom-to-bust cycle, the report’s authors point out.
“Shipowners order new vessels when times are good, yet delivery takes place two to three years later.”
If an economic recovery is underway, you will not see it in the BDI: “Even if demand were to pick up now, the surplus of capacity would still prevent charter rates from returning to the high levels of 2008.”
Other factors have skewed the index, the authors pointed out: “New technologies and vessels are more expensive, while requiring lower expenditures for fuel or manning. Small variations in demand thus lead to larger variations in prices.”
Referred to by one business magazine as “the best economic indicator you have never heard of”, the BDI is today influenced to a much larger degree by financial traders with no direct interest in the industry.
“The BDI appears to be increasingly influenced by market players who are not themselves providers or users of shipping capacity. An indicator of this trend is the growth in forward freight agreements (FFAs). In 2005, the volume of physical trade was twice the [financial] volume of FFAs, while in 2008 the volume was 10% above the volume of physical trade.”
Neither should containership charter rates be considered a good economic indicator, Unctad said.