The costs of shipping bulk commodities have fallen to a near three-decade low, raising concerns about global economic growth. However, there are a number of elements at play and analysts have warned about reading too much into the slump.
The Baltic Dry Index, a measure of a number of shipping routes and the prices for transporting major bulk commodities, has fallen 29.2 per cent in 2015 to 554 points – the lowest level since 1986. Over the past 12 months it has dropped close to 50 per cent.
The World Bank recently downgraded global growth by 20 basis points to 3 per cent for 2015. So it would appear that a drop in the BDI would match the faltering growth narrative in the World Bank's forecasts.
But there are numerous moving parts which impact the BDI, not least of all the plummeting oil price.
"With the oil price effectively halving, freight rates all around the world are coming down," UBS commodity analyst Daniel Morgan said.
This year, oil is effectively flat, but it has had massive fluctuations of more than 20 per cent in just a matter of days. In the past 12 months, Brent crude oil has fallen 44.2 per cent to $US57.64.
"That's your big variable cost in freight. You're paying for the bunker fuel to transport the vessel from one place to another."
The freight cost of shipping iron ore from Western Australia to China for much of 2014 was around $US8 to $US10 dollars per tonne; that cost is now around $US4 to $US5 per tonne, Mr Morgan said. Shipping iron ore from Brazil to China has halved from $US20 per tonne to around $US10 per tonne in the same period.

David Fuller's view

The Baltic Dry Index (monthly & weekly) has fallen to its 1986 low, alarming a number of market observers in the process.  What should we make of it?

There are more than enough factors out there to worry us in any market cycle.  Moreover, there are no certainties, but as investors we do not want to lose sight of the big picture.  The BDI is volatile, particularly in this century to date.  I have never regarded it as a particularly good indicator, and I take comfort that in 1986, that low did not have any significant impact on Wall Street’s secular bull market which was in its fourth year.  However, I should definitely be alarmed when we next see a huge spike to the upside, as last occurred in 2008.