Shipping Recovery Toolkit: What You Need To Know About Shipping Indexes

Shipping Recovery Toolkit: What You Need To Know About Shipping Indexes

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If you're not already familiar with the benefits of following the shipping index you're missing out on one of the key global economic indicators. But don't worry, we all start at the beginning. Here are some basics you should know about shipping indexes and what's happening today.

The Baltic Dry Index

When investors interested in the global economy want to take its temperature, the Baltic Dry Index is a go-to thermostat. The index measures four different sizes of transport vessels that carry commodities such as coal and grain.  It offers a generally non-speculative guide to shipping supply and demand.  For example, when demand for commodities increases over availability of cargo ships, the index goes up.  Of course, the BDI has been in a global slump as demand has decresed for raw materials used to renew infrastructure .

 

Implications: Supply of dry bulk carriers (ie. big cargo ships) is very inelastic.  They are expensive to build and maintain and take time to build.  As a result the index is frequently cited as lagging both behind measuring supply and catching up with demand since it supplies raw building materials that need to be processed.  News in September that China is looking to boost infrastructure spending $157B nudged the Shanghai Composite Index 3.7% though this hasn't correlated directly with the BDI's recent recovery over lows in the 600's.

 

 

Dow Jones Transportation Average

This US stock market index has been closely watched as a gauge of American economic activity. It includes major railroads, trucking, airlines, and delivery services–a total of 20 companies that are weighted by price.

 

Implications: Falling 5.6% in the last six months, the index has foreshadowed lowered expectations for several companies making headlines this month including FedEx (FDX). (FeDEx is often referred to as an economic bellwether.) The index is a red flag despite gains the Dow Jones Industrial Average, suggesting domestic trade has not caught up to the hype. Norfolk Southern (NSC), a large coal transporter, is reacting to lowered prices for natural gas despite upward movements in the BDI.  Railways as a whole are doing worse as a result.

 

Something to think about: although losses in the index are taken as warning signs, it lags behind demand. The indices reveal an opportunity to cut costs, increase efficiency, and adjust to compressed margins.

 

 

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