The Irrelevance of the Baltic Freight Index
"There has been a great deal written of late regarding the collapsing Baltic Freight Index, with those writing about that weakness making the case that that collapse speaks volumes about the state of the global economy. This is nonsense, for the collapsing Baltic Dry Freight Index speaks only to the idiocy and greed and very poor timing of ship owners and nothing more.
We begin this discussion by stating for the record that we believe it was we here at TGL and Jim Grant of the eponymous newsletter who brought the Baltic Freight Indices to Wall Street’s attention more than a decade and a half ago. Then it was indeed a fine and useful economic tool. It rose ahead of economic growth; it fell ahead of economic weakness. Its worth was proven. We embraced it enthusiastically and we extolled its virtues.
However, in the past several years its usefulness has waned to the point where we’ve not even paid attention to its plunge. Why? Because the index has fallen for the very simple reason that there were far, far, FAR too many ships brought on line when the BFI rose from its low at or near 2000 back in 2005-06 to its high near 11,500 in 2008. Ship owners became stupidly greedy believing that these good times would continue ad infinitum.
Worse, the banks that supported them became even more ignorant and financed those dreams. Ships were built and they were big ships and bigger. Ships were being scrapped, but the ships being scrapped were capable of carrying 2-5 thousand TEUs (twenty-foot export containers) and they were being replaced by ships capable of carrying 15-20 thousand TEUs! We are not math whizzes here at TGL, but even we know that one has to scrap a lot more 2-5 thousand TEU carriers to offset one carrying 17 thousand.
Further, the cost of moving a ship carrying 15-20 thousand TEUs is not much different than that of one carrying 1/10th as many. Once the ship is underway, the fueling cost of the larger ship is marginally higher than that of the smaller. Given the numbers of large ships contracted for and built over the course of the past two or three years, the over-supply of space-aboard-ship is high and is rising. Greed and stupidity have trumped economic wisdom.
Thus, where others are pointing to the weakness in the Baltic Dry Index… it has fallen 11,500 in 2008, to 4,500 in early 2010 to 800 presently!.... as evidence of economic weakness we suggest instead that it is a simple inverse index of stupidity and nothing more. Rather, we count the numbers of TEUs moving through the port facilities around the world as the true signal of economic strength or weakness, and those numbers are rising, not falling. The BFI was a fine index to watch fifteen years ago; it ain’t no more, unless you are trading shipping owner’s greed and stupidity."