Beware the Baltic Shipping Index Signals - Part 2

Since I did the first “don’t get excited” post less than 6 weeks ago (see prior post “Don’t get fooled by the Baltic Shipping Index” May 4-09), the Baltic Shipping Index has more than doubled. Here’s what Fleet Street Invest says about the recent rally:

The Baltic Dry Index (BDI), a measure for shipping prices of dry bulk cargoes, had been enjoying a great run, clocking in gains for 11 weeks in succession. But we saw this as a direct effect of the Chinese hastily stocking up on cheap commodities. And the uptrend in the ‘trade gauge’ recently ran out of steam.

The index lost a record 92% during the onset of the credit crisis last year, when trade took a severe blow. Then this year, Chinese buying meant the BDI rocketed by over 125% from 15 April to 10 June.

But on 3 June, the tide started to turn again, with the BDI falling 20% in seven days. China has bought way in excess of actual domestic demand - and this is not sustainable. Already, 90 freighters carrying iron ore are lying idle off Chinese ports, because of a lack of storage facilities. As the pace of this stockpiling starts to slow, the BDI will fall.

What should we learn from the BDI? The indicator is a good one to watch since it predicts future global industrial activity ahead of official statistics, as producers need to buy raw materials in order to create final products.

The recent dip may look small against the rally in 2009, but it’s a very noticeable one over a relatively short period. And it clearly shows the impact of China’ buying spree, leading us to believe that shipping demand won’t hold up as China’s commodity shopping slows down.

We’re likely to see further plunges in the index until the global economic recovery really kicks in. The trade gauge could stand to lose most of its amassed gains from earlier this year.

Amen.

On Seeking Alpha: Beware the Baltic Shipping Index Signals- Part I

Comments

[Dave Wrixon:]

Sounds a bit remininscent of the Nigerian Cement crisis.

Jun 17 07:27 AM

[geewow:]

China has been pumping billions into development projects as their stimulus to the economy. The ore might be directly related to the infrastructure development stimulus. Also, could commodities be the new gold? Hold on to rice, ore, beans, etc and wait until the price really jumps.

Jun 17 10:06 AM

[Fighting Yoda:]

One interesting data is BDI futures - a couple of years out - is much lower than today. The reasons cited are new capacity coming online.
Current rise (despite some fall now) is mostly due to shipping capacity taken offline and not so much due to rise in demand, demand is still low - the rates do indicate that. There is relationship between BDI and commodity demand but you must consider all the factors to draw appropriate conclusions. BDI in itself indicates demand/supply of ships and not necessarily commodity demand.

Jun 17 12:26 PM

[Alphameister:]

Significant uptrends in the BDI have an excellent track record of heralding new bull markets. That's true even when their uptrend does not persist.

Jun 17 06:56 PM

[Northstar10000:]

Track records !! wow the world is full of track records that were smashed to bits in the bear market.

Jun 17 08:08 PM

[parkwood:]

Current BDI especially BCI is absolute a bubble supported by some short term factors, you couldn't see drybulk shipping return to bull market when steel and iron ores are still in bear markets. Some of these factors are the overstocking in China and port congestion. Now the spot price of iron ore in China is close to benchmark price that China refused to accept, and shipping fee is very high, so the overstocking will get eased soon. For port congestion, it will take a couple of weeks, but won't last long. Another important factor I guess is, it is very likely related to the current deadlock between China and Rio-BHP in ore contract price negotiation. China now is trying to flirt with Vale to reach some kind of agreement first, this will give hard time to Rio-BHP if the chinese have some kind of success, but the disadvantage of the Brazilian ores is it's shipping fee, Brazil is much far away from China than Australia, so the shipping fee difference is a favorable weapon to those australians. If we can see any clear result of the negotiation before the dealine of this month, the current turbulence may wane.

Jun 19 01:37 AM