By Chris Shaw

The Baltic Dry Index (BDI) is often used as an indicator of commodities demand as it is a measure of worldwide international shipping prices for various dry bulk cargoes, but according to Barclays Capital the fact the index is now 46% off its high for the year is not a contradiction to the argument the global economy is recovering. Global demand is just one variable impacting on shipping rates.

As Barclays notes, factors such as new ship deliveries and the rate of scrappage also impact on shipping rates, with the BDI suffering this year from an oversupply of ships given more than 300 have so far been delivered in 2009. At the same time, fleet deletions have slowed materially.

This reflects a pick up in the new ship delivery rate as the group points out in both 2007 and 2008 total ship deliveries were between 300-380 annually, whereas the current pipeline suggests around double this amount will be delivered in 2009. On the plus side, this increase in ship deliveries is likely already priced into the market. Barclays does acknowledge it should still act as an anchor and so restrict any further gains.

Barclays believes the recent softening in the BDI has been a demand-side story and is largely a reflection of the demand for coal and iron ore as these materials are the main demand drivers for Capesize ships. A Capesize ship was originally one too large to transit the Suez Canal, meaning it had to pass either the Cape of Good Hope or Cape Horn.

The Chinese stimulus package drove increased buying of iron ore and coal in that market as stockpiles were replenished ahead of expectations of increased demand and possible domestic supply uncertainties. This drove a sharp increase in Capesize rates as these ships are most used to transport these products, but much of this has been given back in the past couple of months.

Capesize rates are now at levels in line with those for Panamax and Supramax vessels, reflecting an easing in the rate of import growth in the Chinese commodity market. This implies the BDI has further to fall, unless as Barclays notes, there is a pick up in commodity demand among OECD nations to replace the easing in Chinese demand.

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