“I have no friends and no enemies - only competitors.”
We’ve had our eyes on the Baltic Dry Index, which has had a massive rally year-to-date and over the last three months. The BDI is one of the best proxies for global demand as it signals the increase in demand for cargo containers. As shippers require more containers, simple supply and demand dictates that the price for those containers will commensurately increase. The quote from the now deceased shipping magnate, Aristotle Onassis, explains this relationship directly. Shipping is a highly competitive industry, so rates for shipping are very sensitive to increases and decreases in economic activity.
The Baltic Dry Index, in particular, is very relevant. As was recently written in Slate, “because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.” Further, “because it provides an assessment of the price of moving the major raw materials by sea, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."
The important takeaway form the move we have seen in the BDI year-to-date (outlined in the chart below), which has also been echoed by the prices of copper and related commodities, is that this economic resurgence we are seeing in the prices of commodities globally is not illusory. There has been a real and sustainable pickup in demand for basic industrial inputs on a global basis. China has obviously been a key driver of the pickup in shipping rates, as Andrew Barber discussed in detail in his recent China Black Book. Specifically, China has imported an estimated 297 million tons of iron ore in the first half of 2009.
While the price move of the index verifies what we already know, the question remains, what is the BDI telling us about the future? We are seeing certain rates decline over the last week, which may suggest that we are seeing a bit of a summer slowdown. Some strategists are suggesting that we will see a serious decline in economic activity from China in the upcoming quarters. We currently do not hold this view, but will be watching the BDI as an indicator for continued demand from China for materials needed to continue its furious infrastructure building activity.
Daryl G. Jones