Does the Baltic Dry Index offer a sober view of the global economy and the outlook for commodity prices?

Long seen as a barometer of global economic activity the Baltic Dry Index (BDI) halved in value between June and September 2008 from a high of over 11,400. Then Lehman Brother’s went bankrupt and the BDI continued to plummet to around 700 by the end of 2008 as shippers were faced with the combination of a sharp drop in demand for the key commodities making up the BDI (cotton, iron ore, grains etc), an oversupply of vessels and a significant tightening in the availability of credit to finance commodity transactions and trade.

Fast forward three years and many of the factors that followed the drop sharp drop in the BDI in 2008 are present again. Over the past 12 months the BDI fell from 3,000 to 1,000 in February 2011. Since February however the BDI has risen by around 90% to 1,900 in mid-December, during the same period when many commodities including cotton saw prices crash in value. While the decline in the BDI to its low of 1,000 in February 2011 can be seen as being a good indicator of future weakness in commodity prices the recent rebound suggests the current drop in commodity prices may have run its course.

As the Euro debt crisis has escalated and concern over exposure to sovereign debt has forced banks to reduce their exposure and increase their capital some of the key linchpins to global commodity trade to be affected have been the French banks such as BNP Paribas and Credit Agricole. Commodity traders and shippers alike have expressed concern that sharply reduced credit availability from these banks has will impact on global trade in commodities. The recent increase in the BDI may suggest, that at the moment, these concerns have been overblown. But if concerns do escalate, the Baltic Dry Index may be the first warning of something more serious.