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A cargo ship loaded with containers bound for Vancouver's port makes its way under the Lions Gate Bridge. (JOHN LEHMANN/GLOBE AND MAIL)
A cargo ship loaded with containers bound for Vancouver's port makes its way under the Lions Gate Bridge. (JOHN LEHMANN/GLOBE AND MAIL)

Baltic Dry plumbs 25-year depths Add to ...

People often talk about the Baltic Dry Index as being a "canary in the coal mine". But right now, maybe "elephant in the room" might be more fitting.

The index of shipping rates for dry bulk commodities - such as iron ore, coal and grains - has long been considered by market afficionados as an advance warning system for changes in economic fortunes. When the index surges, it means shipping demand is spiking, a strong sign for a pick-up in economic activity. When the index plunges, it means ships are sitting empty - a sign of evaporating demand for goods.

What's it been doing lately? Dropping - fast and far.

The Financial Times noted that the Baltic Dry Index hit a 25-year low Wednesday, after falling for its 30th consecutive day. That's quite the losing streak - though it's one that financial markets have been pretty much ignoring as they marched blissfully higher in the early weeks of 2012.

The main reason for the Baltic Dry's fall, we've been told repeatedly, is not a lack of demand for shipping these goods (which would be worrisome to the broader global markets). It's a glut of ships to carry them (which, frankly, markets don't much care about).

A surge in shipping rates during the commodities boom of 2006-2008 convinced shipping companies to order more ships to be built, and many of those ships are only just being delivered now - into a world that, frankly, doesn't really need them.

That would explain historically low freight rates. But it's nevertheless puzzling that the Baltic Dry has continued to slide from already-low levels in a month when - if the economic data are to be believed - manufacturing activity has been picking up in most of the world's key economies. On Wednesday the United States, Britain, Germany and China all reported improved manufacturing growth in January.

It certainly raises questions about the health of China in particular. The country is not only a massive importer of these bulk goods, but it is also notoriously volatile in its buying - sometimes suddenly disappearing from a market when it determines that its inventories of these goods are more than adequate to meet its expected domestic needs.

Could it be that the Chinese, despite their modest uptick in manufacturing activity last month, have seen the writing on the Great Wall - that their economy is going to slow further - and thus have severely curtailed their bulk imports? Some experts suspect so.

Others, however, have a simpler explanation for China's apparent shipping slowdown. We're in the midst of Chinese New Year - a two-week celebration that started about a week ago and is the biggest holiday in the country. They suspect shipments will pick up once the festivities wind down and everyone returns to work.

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