The Baltic Dry Index (BDI), which measures the price it costs to ship raw materials by sea, is falling again — and fast.

#-ad_banner-#The BDI isn’t a regular stock index like the S&P 500. It’s a composite survey of daily shipping prices around the world. The higher the reading, the greater the demand for shipping, and the higher the price.

Many see the Baltic Dry Index as a key leading indicator for global growth and production. This is because the index offers a real-time look at global demand for raw materials. Unlike stock and commodities markets, the BDI has no speculative players. What you see is what you get. The only people who move the index are those who have cargo to ship and those who have ships to move cargo.

As you can see in the chart, the S&P 500 Index (in red on the right axis) closely follows the BDI (in blue on the left axis). This suggests the recent drop in the BDI will be soon be mirrored by a drop in the S&P.

In August, the BDI posted a -28% drop, its biggest since last October, when shipping rates were in a freefall. Since the index hit a high for the year in early June, the BDI has fallen by about -44%, from 4,291 to 2,421. Many see this number falling further.

The reason for this is two-fold.

First, China appears to be cutting back on many of its raw materials imports. China was stockpiling raw materials when prices were depressed. Now, as prices have risen, this buying spree is slowing. In fact, Chinese officials called for a reduction in steel and cement production last week. If they follow through, this will not only weaken prices in the input commodities, it could also weaken shipping prices since a lot less material will be shipped.

Second, many new ships are hitting the seas at a record rate. During the past five years, about 300 new dry-bulk ships were launched each year. This year, however, that number is expected to be much higher. About 1,000 new ships are expected to begin plying the high seas in 2009. And another 1,000 in 2010.

All this has some analysts saying the Baltic Dry Index could fall another -50% or more this year. This is bad news for the stock market because of the Baltic Dry’s historical correlation with the S&P 500, which could drop -25% if the trend continues.