A security guard stands in front of a stock monitor at the Shanghai Stock Exchange Building, in Shanghai, on Feb. 3, 2020.Yifan Ding/Getty Images
The sweetest little economic index you never heard of is called the Baltic Dry Index and it’s in free fall. Its decline began well before the coronavirus outbreak and doesn’t bode well for world economic growth.
The index measures the leasing rates for the huge cargo ships that deliver iron ore, coal, grains and other bulk commodities to global markets. When demand for these ships rise, the index climbs; when demand falls, the index falls – pretty simple, really.
The index, run out of London by the Baltic Exchange, is considered a fairly reliable, if imperfect, leading economic indicator. It’s imperfect because marginal increases or decreases in shipping demand can push the index up or down pretty quickly, because the supply of ships cannot change quickly.
Still, if the Baltic baby is right this time, we’re in for a storm. The index’s all-time high came in mid-2008, after which it went into steep decline. Not long later, much of the Western world was in deep recession.
On Friday, the index fell to 487, its lowest level since April, 2016. Last week’s loss was 10.5 per cent and marked the eighth consecutive weekly decline. While the coronavirus outbreak is certainly accelerating the slump, the sharp fall began months before anyone heard of the virus. The index’s recent peak came in mid-2019, when it topped 2500. The Donald Trump-inspired trade war between the United States and China helped to propel it down.
The index was down again on Monday morning, European time, when Chinese stocks fell 8 per cent as traders returned from the extended Lunar New Year holiday. The sell-off marked the worst opening for the Chinese market in 13 years. More than 80 per cent of the companies on the CSI 300 index of Shanghai- and Shenzhen-listed companies fell by their 10 per cent maximum daily limit.
By the end of Sunday, China had 361 coronavirus deaths and more than 17,200 confirmed cases.
If the Baltic index was tripping downward in isolation, we might have less to worry about. But it’s not. Two other measures of economic growth – oil and copper prices – are also sliding pretty fast.
Copper, which is used in everything from laptop computers to the wiring in your house, sank to a five-month low late last week (though bounced up a bit on Monday morning on the London Metal Exchange). While the price fall accelerated in mid-January, about when the coronavirus outbreak turned into an emergency, the metal’s decline began well before the virus shut down cities in China.
Oil is in rough shape. At the start of the year, Brent crude, the international benchmark, was north of US$69 a barrel. On Monday morning, after weeks of relentless decline, the price was closing in on US$56, taking 12-month loss to more than 10 per cent. Exxon Mobil is down 15 per cent over the year and Goldman Sachs just downgraded the shares to “sell”; Canada’s Suncor Energy has lost almost 5 per cent.
Whether oil is in a bear market for a long time is impossible to say. If the coronavirus is contained, Chinese oil consumption and demand for airline fuel could bounce back, lifting prices. Restriction of supply by OPEC cartel, which is led by Saudi Arabia, could put a floor on prices. OPEC may be close to reaching its pain threshold.
Overall, the plunge in the Baltic index with the fall in oil and copper prices does not bode well for global economic growth and the problems in China appear to be driving all three of them down. As the coronavirus, spreads, so might the pain for commodity investors.