Commodity Analysis

Sunny days ahead for merchandise trade?

Lokeshwarri SK | Updated on January 11, 2018 Published on May 07, 2017


Dabarti CGI/   -  Dabarti CGI/

Baltic Dry Index and World Trade Organization’s indicator signal that 2017 could be a little better than last year

India’s exports for March 2017 were $29 billion, a level not seen over the last two years. Imports were close to $40 billion, another multi-year high.

India’s external trade has been inching higher over the last few months and this revival in India’s trade is just a manifestation of the overall improvement in global trade.

India’s external trade is greatly dependent on the external demand conditions and global trade. Two of the lead indicators for global trade, the Baltic Dry Index and the World Trade Organization’s indicator have been signalling that 2017 could be a little better than last year as far as global trade goes.

Here’s a closer look at how these indicators work and what they portend.

BDI reverses higher

The Baltic Dry Index, constructed by the Baltic Exchange, captures the changes in the cost of shipping various raw materials. Data is captured from shipping companies and across major routes to construct the index. The Baltic Dry Index is the composite index that takes into account data from three sub-indices, the Baltic Capesize, Panamax and Supramax indices.

These three indices show the movement of shipping cost in different kinds of dry bulk carriers, commonly used in global shipping. Capesize ships are the really large ships with load-carrying capacity or 100,000 deadweight tonnage (DWT) or greater. Some of the largest ships in this category can carry loads of more than 400,000 DWT.

The capacity of Panamax ships is between 60,000 and 80,000 DWT. Supramaxes are the smallest ships, with load carrying capacity below 60,000 DWT. Supramaxes are better equipped for loading and unloading goods, making them more suitable for smaller ports.

The BDI is considered a lead indicator of world economic growth and trade. Since these ships are used to transport raw materials, including coal, steel, cement and agri commodities, the charges and the quantity that is shipped are quite sensitive to global demand.

Past data indicates that this indicator has been able to warn about impending slowdown in trade, in advance. For instance, the BDI peaked at 11,440 in May 2008 and declined from there to hit a low of 715 by November 2008. But global trade continued to grow in 2008, increasing from $14.2 trillion in 2007 to $16 trillion in 2008. It was only in 2009 that trade contracted to $12.5 trillion. The fall in BDI preceded the contraction in global trade in this period.

While there were intermittent rallies in the BDI since 2009, they have not been able to move much beyond 4,000. The commodity prices crash of 2016, in fact, dragged the index to a low of 290 by February 2016.

The good news is that the index is up more than three-fold since this low, trading at 1,109 on April 17, 2017. It hit 1,297 in March, a level not seen since November 2013. The expansion in BDI augurs well for global trade as well as for India’s imports and exports.

The WTO indicator

The World Trade Organization also constructed a lead indicator in 2016 that is expected to give advance signals about contraction or expansion of global trade.

The WTOI considers readings on data including export orders, international freight volume reported by the International Air Transport Association (IATA), total container volume captured from a dozen major shipping ports, automotive vehicle sales and/or production figures in major markets, customs data on electronic components trade and customs data on trade flows for agricultural raw materials.

If the WTOI reading is at 100, it indicates that trade growth is in line with the long-term trend. If the reading is below 100, it will mean that trade growth is slowing and above 100 will signal a pick-up in global trade. The latest available reading of the WTOI is for November 2016, which is at 102. This implies that the first few months of 2017 will see a small uptick in growth, above average.

WTO statistics

Besides these lead indicators, forecasts put out by the WTO too seem to be turning a trifle positive. In its trade outlook released this calendar, the WTO said, “Global economic growth has been unbalanced since the financial crisis, but for the first time in several years, all regions of the world economy should experience a synchronised upturn in 2017. This could reinforce growth and provide an additional boost to trade.”

The WTO has forecast that global trade will expand by 2.4 per cent in 2017. But given the uncertainty caused by short-term economic and political developments, the WTO has placed the growth in the range of 1.8 to 3.6 per cent this calendar. Trade growth in 2018 is forecast in the range of 2.1 and 4 per cent.

Published on May 07, 2017

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