Shipping forecast key to economic recovery

Posted on: 16 September 2011 by Andrew Stallard

Andrew Stallard examines the prospects of an uplift in world trade by studying the Baltic Exchange

Freighters moored in CornwallAt the start of a rather damp and chilly September, many of us are wondering not only where yet another barbecue summer went, but when the current economic gloom will end. Is there any sign that things are getting better? It’s hard to tell with so many confusing economic signals; the Stock market gyrating wildly with large percentage moves up and down on a daily basis and the price of gold, the traditional refuge of the worried and uncertain, is at an all time high.

I was thinking about this while kayaking along Carrick Roads in the River Fal on one of the few summer days we enjoyed last month. The River Fal provides a beautiful, sheltered and relatively cheap, deep water anchorage for large commercial vessels not currently in use.  I decided to paddle up the River and count the number of cargo ships in the deep water anchorage and to test out a theory.  My theory was the fewer large ships laid up, the better the prospects for World trade and economic recovery. 

As I paddled past the King Harry ferry it became clear there were a large number of these resting leviathans. An orange Monrovian registered cargo ship losing its battle against rust but also a pair of freshly painted blue car ferries. I counted at least six assorted floating giants before the weather turned. And thus concluded my investigation into a barometer for the prospects for World trade.

So based on the ‘Fal theory’ the view from the man in the Kayak on the River Fal is that there is no sign of an upturn in World trade and we face continued economic despondency. But is this true or is there a more accurate measure of demand for shipping and therefore the prospects for future World trade and economic growth?

Well yes there is. An alternative measure is the Baltic Dry Index (BDI), an index which measures the cost of hiring space on cargo ships to transport raw materials worldwide. This figure is quoted daily by the London-based Baltic Exchange, which can trace its history back 250 years to a coffee house where sea captains and merchants would meet.  

As the amount of shipping available is largely fixed, simple rules of supply and demand operate - the greater the demand for shipping, the higher the price and this is reflected in the BDI. More importantly, as shipping needs to be ordered in advance (it takes time to move ships into position or retrieve them from the River Fal) the BDI tends to be a leading indicator of economic recovery or further decline.

In past times, the price of many commodities, such as wheat has been used as a measure; however with prices having been distorted by speculation (people buying the commodity as an investment rather than to use in the hope the price will rise, producing scarcity and artificially pushing up the price further) that this has become unreliable. In fact, in the case of oil, the price has become so much that we feel like we have been mugged each time we fill up the family car! The BDI however can be seen as a more reliable sign of recovery due to the absence of speculators - people only book cargo space when they have goods to ship.

Although the price of shipping can be volatile, there are signs that the BDI is rising rapidly. It is 21% above its recent low and rose 16% in one week at the end of August (1). So perhaps World trade is about to increase and the end of the present economic down turn is in sight. You never know the weather may get better too!

For a free one hour financial health check call Worldwide on 0845 230 9876, e-mail info@wwfp.net or take a look at our website www.wwfp.net.

Source: Think Big

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