10 January 2017

Baltic Dry Index Market Buoyed in 2016 By Increased Demand, Accelerated Ship Scrapping

The Baltic Dry Index had a wild year in 2016, plunging to a record low of 290 points in February amid concerns that China’s economy was headed for a hard landing, and then recovering as the country moved to boost its economy by implementing stimulus programs.

China’s stimulus programs included infrastructure development that boosted demand for seaborne raw materials. In addition, unexpected upside came from increased demand for coal imports as the country cracked down on domestic production. While the recovery was volatile, the BDI is closing the year just shy of 1000 points.

The BDI’s recovery has largely been a result of increased demand, but data also suggests that accelerating ship scrapping rates have contributed to the upside. Containership scrapping progressed in 2016 with 201 vessels accounting for 699,000 TEUs sent to the scrapyard over the course of the year, according to data from Braemar ACM. The acceleration in scrapping rates was due to low charter rates.

While rates remain low, they have recovered over the course of the year and going into 2017 shipping market participants are cautiously optimistic. The caution stems from the concern that if hire rates increase significantly, scrapping rates may stall and/or more idled ships may be put into service, depressing rates.

A major drag on the BDI has been the oversupply of ships. The world is awash with ships because ship building accelerated during the last economic expansionary cycle, and these ships came online once the global economy cooled. Even though the global economy has, overall, improved, supply is still above demand, and with many ships competing for cargoes hire rates remained depressed. As long as there is an overhang of ships the BDI has no hope of coming close to its record high of 11,793 reached in 2008.

Source: economic calendar. 29 December 2016

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