Michael Pascoe writes:

Given that federal Labor’s only strategy for winning government seems
to be doing nothing and waiting for the economy to fall over, there
just
might be a little good news for Kim Beazley hiding in the delightfully
named Baltic Dry Index. No, it’s not an
indication of sobriety in Estonia or Latvia,
but a measure of international shipping prices for bulk dry goods ie
commodities. One aspect of the China-led resources boom has been an
escalation
in shipping costs, prompting the Reserve Bank to make the following
observation
in its May Statement on Monetary Policy:

The strength of
world trade and the shift in trade patterns can also be seen in global shipping
freight rates, as shipping still accounts for around two-thirds of the value of
all international goods transportation. In line with the pick-up in commodity
demand, the Baltic Dry Index… has soared to unprecedented levels over the past
two years. Unsurprisingly, the pick-up in freight rates has been especially
concentrated on trade routes to Asia and the
ports along these routes have become increasingly congested. Conditions are
generally expected to remain tight, in part due to short-run inelasticity in
the supply of ships and continued strong world activity.

Inevitably the impact
of publishing such wisdom has been to cause the BDI to crash. It had briefly
spiked above a ridiculous 6,000 in December, but from a more reasonable 3,430 on
24 May, it closed at 2,486 on Friday night, which puts it back where it was
before financial markets discovered China in late 2003. (It turned out to be a
big country in Asia with a lot of people who
make stuff.)

There are
commentators who believe the present BDI fall means the market is getting ready
for a rally, but now there’s a different freight warning to give
us reason to wonder if the game might be coming off the boil: Air freight was down
1.6% in May compared with May 2004.

“May cargo growth
slipped into negative territory in Asia, North America, Latin America and Europe, following sluggish performance since the
beginning of 2005. As a leading economic indicator, the slowdown in cargo
traffic demonstrates that the high price of oil is slowing the global economy
faster than expected. Passenger traffic for May at 8.8% was much stronger. But
we can expect a downward trend as the decline in economic activity works its
way through the economy,” said Giovanni Bisignani, IATA’s Director
General, last week.

This probably is just a
bump along our economic road – there is
nothing temporary about China’s
resources needs – but it’s a bump we could feel given our heavy dependence on
the commodities lift this financial year as our domestic economy is travelling
more slowly post-housing bubble. If you see Bomber Beazley checking freight
rates, you know why.

PS And if
anyone wants to know, the BDI name comes from
London’s
Baltic Exchange which calculates it.

Peter Fray

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