The golden days for the Baltic Dry Index (BDI) are history. The BDI tracks transport costs on international trade routes for dry bulk commodities such as coal and iron ore. It's well known that the index, although it is very volatile, is influenced a good deal by demand from China.
In fact, the nearly 50% increase seen in the BDI from the beginning of November to December-end was mainly on account of increased restocking of iron ore by China. Trouble is, in the first two months of this year, the index has declined by about 45% from December-end. "January saw the index crashing owing to lower demand from China due to the Chinese New Year holiday," said a note from ICICI Securities Ltd. Analysts say the culprit is very high Chinese inventory. High iron ore inventory of 90 million tonnes in China at the end of January led to subdued demand in February, putting further pressure on the index. In comparison, the average inventory level for 2013 was 72 million tonnes.
True, the BDI has recovered from its lows recently, but a remarkable improvement is not on the near-term horizon. Over the longer term, with quite a bit of fleet addition already done during 2013 (8% of the current global fleet) and a further 18% of current capacity to be added by CY16, the rise in freight rates is likely to be restricted. The slowdown in the Chinese economy, too, should be a dampener.
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