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Baltic Dry Index – Significant correction indication of more trouble ahead?

With a double-dip recession still a possible scenario, investors are carefully screening the market for macro economic indicators that reveal information about the future direction of the global economy. One indicator that has received a lot of attention lately is the Baltic Dry Index, a measure which tracks worldwide prices of various bulk dry cargoes. This index is often seen as a leading indicator for future economic growth, since many goods and materials need to be shipped around the world.
This index has fallen significantly in the last months, actually by almost 50%. With economic growth expected to moderate further in 2011 many investors now fear that this will point to a double dip recession. How useful is this index in making forecasts about future economic development? We have been following this index for a long time and while we do think it is somewhat useful to make economic forecasts, the index is unique and a number of special factors need to be taken into consideration. The index is calculated on spot rates for bulk cargoes and usually shipping costs are a relatively small percentage of total contract value. This means that even a small difference in supply/demand can result in large price swings, making the index very volatile. Besides supply and demand, there is another dimension that needs to be considered and that is expansion of supply, meaning total freight capacity, which depends on how many ships are available. 2010 and 2011 will see a further increase of capacity by almost 10% each year, which means supply growth will outpace demand increase, pointing to further price pressure. We think it is more useful to monitor the price development of core commodities used in the production process, mainly commodities such as iron, copper, coal just to name a few. There prices continue to remain firm and actually rising quite a bit, this is in sharp contrast to the Baltic Dry Index.

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