Partner with O’Melveny & Myers
Is Maritime Shipping the Best Global Economic Indicator?

Is Maritime Shipping the Best Global Economic Indicator?

twitterpinterestlinkedintumblr

The nations of the world track the global economy’s ebb and flow using a variety of metrics, including national unemployment rates, GDP, and inflation. However, a lesser-known indicator of the worldwide economic climate is also a primary driver of global trade: maritime shipping. When one considers that some 90 percent of all traded goods are transported by sea, it comes as no surprise that the maritime shipping industry may be viewed as an indicator of emerging economic trends.

Reading the Baltic Dry Index

Since 1985, London’s Baltic Exchange has analyzed 23 global trade routes to provide the industry metric known as the Baltic Dry Index (BDI), which tracks the maritime shipping rates of commodities such as coal, grain, and iron ore.

baltic seaThe Baltic Dry Index has long been considered a useful economic indicator for its ability to reflect changes in commodity demand. Because shipping rates increase in response to rising demand, changes in the BDI can often indicate a nation’s growing demand for a particular commodity before it is indicated in their GDP reports.

Experts referenced the BDI’s minor fluctuations as an economic indicator more commonly prior to the 2008 financial crisis.  At that time, the index reached an all-time high of 11,800 before plummeting over 94 percent in just a few months. The next few years saw gradual recovery, but in July 2014, it had fallen to 723 — nearly its lowest point since the financial crisis.

The BDI then appeared to show signs of recovery, reaching 1,197 by September 2014. However, the index has since taken an unprecedented turn, hitting an all-time low of 290 on February 10, 2016, before gradually climbing to approximately 335 points at the beginning of March.

The BDI’s decline correlated directly with similar slumps in global commodities indexes. In 2015, the S&P Goldman Sachs Commodity Index had neared its lowest point since 2009, and The Bloomberg Commodity Index reached lows not seen since 1999.

Crowded Seas

While this sharp decline in the BDI has generated a great deal of concern among maritime shipping professionals and economists alike, many in both sectors credit the
steep drop in part to a surplus of ships. Following the sudden and severe BDI downturn that preceded the financial crisis, many maritime companies were left with oversized fleets whose capacities far exceeded global shipping demand.

The brief recovery of the maritime shipping sector and recent Baltic Dry Index crash have resulted in a sustained surplus of vessels. In 2015, new ships added a collective capacity of 1.7 million twenty-foot equivalent units (TEUs) to the global fleet, causing ship owners to anchor over 1.3 million TEUs in an effort to curb falling freight rates. But new ship deliveries will continue to raise the industry’s shipping capacity by a projected 8.2 percent through 2017, while demand is unlikely to rise more than 2 percent — its lowest rate since 2009.

The impact of the surplus on maritime shipping rates is clearly reflected in the Baltic Dry Index. For this reason, some argue that the recent BDI slump is merely an indicator of the health of the maritime shipping industry, not the economy as a whole.

Regardless, it is important to remember that the BDI is merely an indicator of shipping prices. While it may provide insight into broader trends, it is ultimately subject to internal industry factors.

Trends in Port Traffic

shipping wharfPort activity has also been cited as a maritime-related indicator of global economic activity. Container shipping traffic through the world’s ports rose nearly 8 percent between 2013 and 2014, but this growth has recently begun to slow.

In 2015, container shipping only grew between .08 and 1.1 percent, marking the second-lowest annual increase in recorded history. The lowest rate of growth occurred in 2009, when ports experienced an unprecedented 8.4 percent decline in throughput as a result of the financial crisis.

Port operators have attributed this unusual slowdown to weakened shipping demand and the absence of a peak shipping season in 2015. Despite slowed growth on a global scale, it’s worth noting that ports in New York, Malaysia, Vietnam, and Ho Chi Minh City experienced double-digit growth.

Watching the Giants

Tracking the performance of the industry’s leading carriers is perhaps the most obvious way to discern a relationship between maritime shipping and the wider economy. During the financial crisis, many smaller maritime companies fell into bankruptcy, while multiple larger firms relied on bailouts and restructurings to stay afloat. Now experts are predicting a new wave of maritime bankruptcies, particularly in China, where the commodities market has slowed significantly.

Due to their large bearing on the industry, the performance of major maritime players such as Maersk are often considered a strong indicator of economic trends. It’s no wonder, as the Danish operator transports some 15 percent of all container trade.

Maersk released an impressive earnings report as recently as August 2014, but in 2015, the company reported a net loss of $2.5 billion. Maersk’s representatives have attributed the deficit to “abnormal trading conditions,” including a sharp decrease in imports to Brazil, Russia, Europe, and west Africa. While the company is optimistic, having reduced its debt and cut costs in preparation for a financial downturn, it has also stressed that the economic climate for maritime shipping is worse than it was in 2008.

Facebooktwittergoogle_pluspinterestlinkedintumblrmail

Sorry, comments are closed for this post.