Baltic Dry daily index of costs for shipping freight up more than 40% in a month, indicating sharp rise in demand
Phillip Inman and Angela Monaghan
The Guardian, Tuesday 19 August 2014 17.14 BST
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The Baltic Dry is a key indicator of the health of the global economy. Photograph: Charlie Fawell/ Charlie Fawell/cultura/Corbis
A measure of global trade has soared over the past fortnight, signalling a possible return to health of the world economy.
The Baltic Dry daily index of shipping costs has jumped by more than 40% in a month, soaring to 1,042 since it hit a post crash low of 732 in July.
The jump in prices for sending freight goods around the world indicates that shipping firms are seeing a sharp rise in demand for their services.
Figures from Lloyds List show the index performed badly throughout 2013 and the first half of 2014, when many shipping companies reported losing money on each container ship, many of which sailed half empty. A gentle rise in prices charged by shippers since early July has accelerated in the last two weeks, taking many analysts by surprise.
Jim Leaviss, head of fixed interest at M&G Investments, said: "Although it's a pretty volatile indicator there is a strong relationship between the cost of shipping bulk cargo – generally intermediate goods like metals – and the strength of the global economy. So the recent 40% rise in the Baltic Dry Index might well be telling us that the global recovery is back on track after a pretty patchy first half of 2014."
Leaviss added that the timing of the Russian sanctions against the EU and the rise in the index might not be a coincidence, possibly reflecting that Russia might be having to ship goods, including food, from further away now that it cannot import from the EU.
David Blanchflower, professor of economics at Dartmouth College, New Hampshire, and a former Bank of England policymaker, said the Baltic Dry was traditionally a key indicator of the health of global economy, illustrated by the sharp fall in the index between May and December of 2008.
"The fall in 2008 was the most catastrophic collapse of any indicator in the Great Recession. The question now is, does it indicate a turnaround? The rise might be driven by an increase in demand, or a fall in ship supply, or both."
On Monday one of the major container shipping organisations urged fleet owners to raise rates on their Asia to US routes by at least $600 per 40-foot container, an increase of 14% from current levels.
Transpacific Stabilisation Agreement (TSA), a lobby group for operators between the US and Asia, said the planned increase followed strong cargo demand and higher capacity levels in recent months, which forward bookings suggest will continue through September.
Its members include 15 of the world's biggest container shipping lines such as Denmark's Maersk Line, a unit of A.P. Moller-Maersk, privately owned Switzerland-based Mediterranean Shipping Company (MSC), French privately held CMA CGM, China's COSCO Shipping and Korea's Hanjin Shipping.
TSA executive administrator Brian Conrad said prices should go up from 1 September to reflect higher demand and offset losses from last year.
"Lines have made modest revenue gains to date this year, but they continue to struggle in terms of returning to profitability," he said.
The container shipping industry has been struggling as vessel capacity has outstripped the volumes of goods for transport in the global economic downturn.
More than 90% of the world's trade is carried by sea, but the overcapacity meant freight rates plunged to unprofitable levels for most carriers in 2013.
Spot freight rates are calculated and published every week by Shanghai Shipping Exchange. Last week rates for transport of 40-foot containers from Asia to the U.S. West Coast stood at $4,218.
The Baltic Dry, which is a composite of costs across all major shipping routes, is issued daily by the London-based Baltic Exchange and provides "an assessment of the price of moving the major raw materials by sea".
Mearsk parent, AP Møller-Maersk, gave a further indication of a return to health on global shipping route after it said better than expected profits in the second quarter of the year meant it would offer shareholders a £1bn buyback.
The Danish owner of the world's largest container shipping line also upgraded its prediction of full year profits to more than $4.5bn, up from its already raised forecast of $4bn three months ago.
Maersk Line, which transports about 15% of seaborne freight, is considered a good proxy for global trade.