At the Continental Telegraph, Tim Worstall explains why, for example, Zero Hedge‘s witterings about the changes in the Baltic Dry Index are not actually predictive of boom or bust in the global economy:
As background, the volume of such shipping – dry is referring to dry bulk cargoes, wheat, grains, cement, that is, not container stuff and not oils – is an important indicator of global growth. Trade tends to, tends to note, increase faster than growth itself. If the volume of trade falls off a cliff then we would indeed think that there’s going to be a kablooie in our global GDP figures.
The Baltic Dry is an index of the prices of shipping these cargoes. It’s thus the interaction of the supply of shipping as against the demand for it. That’s rather more than subtly different to the volume of world trade.
The basic background here is that there are reasonably long lead times to get more shipping afloat. And once it is afloat then it tends to stick around for a decade or two. Building the boat is a sunk cost (sorry) so you keep trying to use it as long as income from doing so is above marginal costs, of maintenance and fuel (and maintenance will be skipped in some circumstances) and bugger the mortgage. The supply of shipping is near entirely inelastic on an annual basis, near entirely elastic on a two decade basis.
Demand for shipping is much more elastic in that shorter term. As is usual when we’ve an inelastic supply meeting an elastic demand in a marketplace we get wild price swings. They being what causes that longer term elasticity – as with, say, oil from conventional reservoirs.
The Baltic Dry can drop because more ships are being launched, it can rise because more are scrapped. Not because – note the can here – the volume of trade has changed at all.
What has actually been happening in shipping in general is that the ship owners all looked at how trade was growing before 2008. So, they thought, aha! 5% volume growth! (Numbers here are made up but indicative of the major points) Let’s order more spanking new ships! Which then start arriving in 2010, 2011. Flooding the market with new supply. And shipping volume didn’t grow at 5%. It grew at 2% instead. (Again, these numbers are made up, reflecting memory and thus not accurate, but the relationships between them are about right) So, prices plunge.
But it’s those prices which plunge, not the volume of world trade.
