Baltic Dry Index Signals Commodity Inflation 27 comments
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The Baltic Dry Index is setting new highs for the year. This measure of freight shipping costs has often been used as an early indicator in the economy. Because of the global nature of shipping, this index may give a broad take on global economic health but is a less reliable indicator of any specific nation’s economy, particularly a service economy like the U.S. It is thought that much of the rebound in the index is related to Chinese demand for iron ore, and has less direct bearing on our markets.
Perhaps more interesting is the relationship between the Baltic Index and commodity inflation. Consider the chart below, a 20 year history of the Baltic Dry Index (the black line plot) and the Reuters Jefferies CRB index (the red bar plot), a common measure of commodity prices:
[click to enlarge]
The close correlation between the two is evident and logical — over the short run, there is a fairly finite supply of shipping available. The price one is willing to pay for shipping goes higher as the price of the goods shipped increases. There are also some secondary factors that could be expected to influence both measures; for example, since both shipping and commodities are globally priced, a hypothetical weakness in the dollar would move both indices higher.
What’s interesting is not the correlation, but that the freight index leads commodity prices. Doing some very simplistic analysis, the freight index appears to lead the CRB by about 1 to 2 months. This suggests that commodity prices, which have been more range-bound this year, may be ready to move higher.
If this is the result of stronger U.S. and global growth, that’s good news. However, if these statistics narrowly reflect, for example, Chinese domestic demand with little spillover effect for our economy, this is bad news. All other factors equal, higher commodity prices lead to lower discretionary spending. We saw rising oil and food prices last spring take a real toll on consumer demand for non-essential goods. With unemployment rising, higher inflation would further hamper the consumer.
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This article has 27 comments:
Thank you for the interesting report. Since this index leads by a month or two, I assume we will see the end user, probably China, increase output due to an increase in raw materials. They paid more for the commodities, and presumably have the capacity and demand to use them. in the near term. Things still seem pretty "flat" here in the states, and so the demand is probably from the domestic Chinese market. They are still positive by 6% or so.
Might be a great trade in shipping coming for dollar investors but so would just about any commodity as the dollar plunges.
Other commodities prices are also being held up by stockpiling made possible by cheap money ie. oil tankers parked at sea, waiting for higher prices.
Copper purchases were up 33% in the first quarter over the year earlier period and from Bloomberg today: China, the world’s biggest iron-ore consumer, imported a record 57 million metric tons in April. Stockpiles in the country have climbed 16 percent this year.
China’s government is spending 4 trillion yuan ($586 billion) to support the economy after first-quarter growth was the slowest this decade.
Good post and interesting analysis, particularly the lead factor. In general I agree with your analysis, but be aware that there are some unusual things going on. The Chinese have been locked in very tough iron ore pricing negotiations with the Brazilians and some of their imports may well represent inventory building to strengthen their negotiating position. Also, as mentioned above, the Chinese stimulus package is kicking in and production for domestic demand has increased.
Notwithstanding, I agree that rapid commodity inflation is more likely than not. It's hard to believe that the world's governments can dump trillions into the money supply without creating significant inflation.
eye-on-washington.blog...
And if you can "kill two birds with one stone" by divesting their US dollars holdings all the better.
On May 15 08:30 AM CautiousInvestor wrote:
> Unfortunately, I and many others tend to believe recent moves in
> the BDI, copper and iron ore prices have to with China's $585 stimulus
> package and its desire to invest in and hold commodities as opposed
> to further investing in fiat currency denominated assets.
>
> Copper purchases were up 33% in the first quarter over the year earlier
> period and from Bloomberg today: China, the world’s biggest iron-ore
> consumer, imported a record 57 million metric tons in April. Stockpiles
> in the country have climbed 16 percent this year.
>
> China’s government is spending 4 trillion yuan ($586 billion) to
> support the economy after first-quarter growth was the slowest this
> decade.
>
if you look at the symbol tips you will see this long term buy signal has happened already. I put the two together and tend to agree with the article. therefore there are two likely components to the issue. dollar weakness and global stabilization of commodity prices
I like industrial metal because it is a real indicator of what is happening in the world. oil looks too traded andmanipulated. If oil dropped 1/2 it's gains and started moving slowly up I would be a believer too.
An increase in commodity prices at a sensible rate will be necessary to counterbalance the monetary stimulus, i.e. help suck the excess liquidity out of the system and get the global economy (as in production not just the price of things) back up to speed.
Good luck!
Donkey Kong
On May 15 12:17 PM Cetin Hakimoglu wrote:
> Sorry Donkey Kong, but you will be finding much less posting from
> me. Better find a new act. I've succeeded in angering 99% of people
> on this site. So I'm on real thin ice at this moment.
seekingalpha.com/artic...
Overall shipping industry asset values look to be in trouble. Future shipping rates seem to be under pressure due to overabundance of new build ships."
seekingalpha.com/artic...
On May 15 01:42 PM dcb wrote:
> I would advise the author to research what is going on in the shipping
> world and the extent of oversupply. many ships in mothballs, and
> more on order. to support prices shippers have taken ships out of
> service at a very fast rate. (this is based on my reading) if anyone
> knows the facts please add to my commentary.
relatively cheap. The index probably reflects some non-hoarding
buying as well as countries gradually figure out what they can trade amongst themselves while reducing their overdependence on the American consumer for sales. Both the hoarding and the
non-hoarding scenarios augur well for ETFs of the nations famous
for their shipping and resource industries. Both scenarios have
plenty of time to play out since there is much overcapacity in both the shipping and resource economic sectors. For long- term, probably not short- term, ETF investing, consider Singapore and Hong Kong for the shipping theme and Chile, Brazil, Norway, Canada, South Africa, Australia for the resource theme.
Yes, there a lot more ships in the pipeline that were ordered last year but not yet delivered—that oversupply is mostly in the future. The vast fleets of idle ships in Singapore are container ships, for finished goods, NOT bulk commodity carriers.
Since the BDI tracks "dry" commodity carriers, it doesn't reflect the still-depressed container market.
This is off the top of my head; I will gladly stand corrected if someone has done more research.
On May 15 01:42 PM dcb wrote:
> I would advise the author to research what is going on in the shipping
> world and the extent of oversupply. many ships in mothballs, and
> more on order. to support prices shippers have taken ships out of
> service at a very fast rate. (this is based on my reading) if anyone
> knows the facts please add to my commentary.
Not directed specifically at the BDI, but shipping related, although many container ships are laid up, as are tankers, for the tankers the situation is somewhat different, since single hull tankers are being phased out, and will be totally out of service by 2015, I believe is the target date. This will sort of offset the current order book of the shipyards.
On May 15 01:42 PM dcb wrote:
> I would advise the author to research what is going on in the shipping
> world and the extent of oversupply. many ships in mothballs, and
> more on order. to support prices shippers have taken ships out of
> service at a very fast rate. (this is based on my reading) if anyone
> knows the facts please add to my commentary.
On May 15 03:49 PM Donkey Kong wrote:
> I am willing to let bygones be bygones. I think you would be embraced
> by everyone if you focused on the quality vs. the quantity of your
> posts. I have zero problem that you are bullish on the outlook for
> stocks. You just need to have concrete examples, statistics, etc.
> when making your case.
>
> Good luck!
>
> Donkey Kong
If you have a link on this info please share.
On May 15 01:38 PM dcb wrote:
> if you follow dbb (which I do) it loos close to long term trend with
> 50 crossing 200 day moving avg. it had a huge ris, and then lost
> 1/2 back up, and unsure at the moment. I expect a drop below the
> 50D and then the long term buy signal. from reading John Aurthor's
> of the FT I have learned comm. stabiliaztion is one of the first
> sign things are leading to a close. the 50% drop I think means that
> the china buying stoppage was priced in.
>
> if you look at the symbol tips you will see this long term buy signal
> has happened already. I put the two together and tend to agree with
> the article. therefore there are two likely components to the issue.
> dollar weakness and global stabilization of commodity prices
>
> I like industrial metal because it is a real indicator of what is
> happening in the world. oil looks too traded andmanipulated. If oil
> dropped 1/2 it's gains and started moving slowly up I would be a
> believer too.
April Ore imports were up 33%, April steel demand was down 4%.
There is 100 million metric tons of Ore stockpiled at Chinese ports and at steel mills, and there is 10 mmt. more on 66 Capes waiting to be unloaded.
The Chinese government has just ordered Banks to cut or stop, lending to steel mills who are "still expanding production, without consideration actual market demand".
The Gov't has also told iron ore importers to " correctly control imports in line with the actual demand of domestic steel" and has ordered an investigation of speculators in the market.
If you look through the quarterly cash flows and eps for these stocks now, you see that after 16 months of this brutal recession, their numbers are at or near all time highs. Not very consumer discretionary-like. The group's price/cash flow, price/revenue, and P/E valuations are all way below the average numbers for the S&P 500, yet most of these names are growing much faster than the best growth stocks in the S&P. And their growth is based on global food demand, not the more unstable things that growth stocks usually depend on.
Jim Rogers is of the opinion that farming is going to become the next great wealth magnet of the world, replacing the whiz kids who sit around creating new debt instruments to wheel and deal. It will be the farmers, Rogers says, who will be driving the Maseratis. He is busy buying up farming operations all over the world.
Technically, the Ag stocks seem to be starting a strong move away from the floor, maybe starting to regain consciousness from last year's beating. They are just now breaking resistance levels going back into '08. Even companies that are only partially involved in Ag chemicals like KMG Chemicals (KMGB) and Hawkins (HWKN) are making this same technical break. Compass Minerals (CMP) is also a lesser known, partial fertilizer play, expanding from their base road salt business into the lucrative Agri potash area. But their stock tends to trade more with the recession resistance group than with the high flying Potash crowd - for now, anyway.
If you're not sure if the stock market is going to be hot or cold, the Ag/gold area may climb either way. The Ag stocks may trade more like defensive food stocks, like they should; and if the threat of inflation eventually cools down the rally, it will benefit gold and the Ag commodities.