The Rent-A-Ship Market

by Elaine Schwartz    •    Dec 1, 2011    •    706 Views

Knowing the price to rent a Handysize can come in handy if you want to measure economic activity.

A Handysize is a small cargo ship. The very biggest vessels, called Capes because of the routes they have to take, are so huge that they cannot fit through the Panama Canal. Next come the Panamax and Supramax and then, the Handysizes.

Ship rental prices respond quickly to demand. Hearing about a bumper wheat crop, you cannot quickly build an extra ship. But you can raise its rental price. By contrast, when less coal, cement and iron need to go anywhere, then prices drop.

You see where this is going. To judge whether global economic activity is vibrant or sluggish, just check shipping activity. How? The Baltic Dry Index (BDI). An index of shipping rental prices, the BDI fluctuates according to the demand for ships carrying “dry” commodities like cement and building materials. When demand soars, so too do shipping costs.

You can read more about the BDI in The WSJ Guide to The 50 Economic Indicators That Really Matter and this Slate article.

To see whether things are moving, here is the BDI.

The Economic Lesson

Economic indicators can be categorized as leading, coincidental or lagging. Stock markets, reflecting investors’ perception of future profits, are leading indicators. the GDP, telling the current state of the economy, is coincidental, and the unemployment rate is a lagging indicator.

Composed of the shipping costs for basic industrial commodities, the BDI is a leading indicator.

An Economic Question: Drawing an inelastic supply curve (almost vertical) and a soaring or sinking demand curve, illustrate the price fluctuations that the BDI monitors.

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