Why the Baltic Dry Index has decoupled from the Chinese market

Baltic Dry IndexEnlarge GraphThe Baltic Dry Index (BDI) is one of several leading indicators that Wall Street uses to assess the outlook of global trade. A rising BDI is a positive for the dry bulk shipping industry, which engages in transportation of major raw materials such as coal, iron ore and grain across oceans. However, a falling BDI is a negative sign.

After reaching near its October high on November 28th at 1,104, the Baltic Dry Index fell to 784 on December 14th, 2012. The BDI attempts to provide an assessment of demand and supply for dry bulk shipping and is often perceived as a leading indicator because the transported raw materials are commonly used as inputs in industrial production. Since China accounts for a large portion of global trade, the index has historically closely correlated with the Chinese market.

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However, the over supply and pending arrivals of excess new vessels make the BDI a less reliable indicator for the Chinese market. Although the Baltic Dry Index has failed to exceed its October’s high, the iShares FTSE China 25 Index Fund (FXI) has broken out of its October / November high of around $38. As more ship orders are fulfilled, additional ships will add renewed pressure on the price of shipping raw materials across ocean. There is a good probability that the BDI will remain depressed as the FXI climbs higher.

Additionally, a lower BDI will be a negative for dry bulk shipping companies’ revenues, earnings, and stock prices. These companies include Dryships (DRYS), Eagle Bulk Shipping (EGLE) and Euroseas, Ltd. (ESEA). The Guggenheim Shipping ETF (SEA), which also invests in high-dividend paying shipping companies, will also be adversely affected.