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MOP

Baltic Dry Index Falling Again

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Seems to have peaked a couple of weeks ago and is falling back now.

http://www.wikinvest.com/stock/Baltic_Dry_...LDRY)/WikiChart

The only info I can find is this article in MoneyWeek:

The shipping index shows most stocks are heading down

By Associate Editor David Stevenson Jun 12, 2009

Have you been watching the Baltic Dry Index lately?

It may sound a bit dull. But it's a key barometer of global freight activity – in other words, it measures the cost of ferrying raw materials around the planet.

The message it's starting to send is very clear: shipping rates and commodity prices are set to tumble. And that means the share prices of many cyclical stocks – which have led the recent rally - will be heading south, too…

The Baltic Dry acts as a monitor of industrial activity

Despite its name, the Baltic Dry Index (BDI) isn't just about Scandinavia. It's published by London's Baltic Exchange, the global marketplace for buying and selling shipping contracts.

The BDI measures the demand for space on so-called 'dry bulk carriers', which carry cargoes such as coal, grain, timber, steel and iron ore. That makes it a 'leading' economic indicator. Manufacturers of course need to buy in supplies of raw materials before they can churn out finished products. So a pick-up in industrial activity will show up in the BDI, as producers stock up on raw materials, before it appears in the official production statistics.

And as the supply of shipping capacity tends to stay relatively unchanged over the short-term – it takes up to two years to build a new ship, and most carrier operators are reluctant to scrap their vessels unless they have to – it doesn't take a big increase in demand for transport space to push the BDI higher.

This is exactly what we've been seeing recently. Last year, as the global recession took hold, the index fell some 90% as trade dried up almost overnight. But in 2009, with the Chinese buying huge quantities of industrial commodities and metals prices rising fast – the S&P GCSI global commodity index is up 37% this year – the BDI has taken off. From mid-April until the middle of last week, it soared 180%.

After taking off earlier this year, it has now run aground

That's got the economic optimists cheering from the top of the mast that global trade, and thus economic growth, was staging a major comeback. Supposedly the end of the recession was in sight. But on the 3 June, the BDI ran aground. It has since lost 20% in a week.

So what's gone wrong?

All that buying from China may have got the shipbrokers excited, but the Chinese were being very smart. They were cashing in on massive drops in the prices of many commodities over the previous year or so, and have stockpiled the stuff. For example, they picked up record amounts of iron ore – which had halved in price - between February and April, loading up 50m tonnes in the latter month alone.

They've also snapped up loads of aluminium, copper, nickel, tin, zinc… and lashings of crude oil too. And there's no doubt these stockpiles will prove very handy one day.

But not yet. Indeed right now, the Chinese have binge bought so much, they've almost bitten off more than they can chew. They're running out of room to store their swag. "At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing", says Keith Bradshaw in the New York Times. Here's the key bit. "Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak".

In a nutshell, that economic recovery the bulls think they can see just isn't happening at the moment. And as the Chinese stop stockpiling, commodity prices will drop again and demand for ships will sink. That's what the BDI is now telling us.

How far will it fall? Ship owners are charging $58,000/day now but just $24,000/day for next year, indicating more ships than cargoes ahead, says Bradshaw. "That's the real market for ships", say Richard Elman of Asian commodity trader Noble Group.

The shipping index could "crash down as far as it has advanced", says carrier operator Precious Shipping. "The fundamentals still overwhelmingly point to a world economic recession with tremendous job losses, and we suspect that will put a real dampener on the current burning hot BDI".

What this means for share prices

This all points to share prices around the world being hit in two ways.

Firstly, the BDI has become a good forward indicator not just of economies, but of stock markets too. A major plunge in the shipping index spells trouble for Wall Street and London. Share indices look ripe for a fall.

Secondly, a big BDI drop is likely to squash the big bounce in 'cyclical' shares that has driven the stock market rally over the last four months, amid hopes that a China–driven global economic recovery was just around the corner.

Shares in basic resources, machinery and information technology companies have rebounded so much, they're now over 30% more expensive than 'defensive' stocks which don't depend on rampant economic growth for their profits, say Charles Dautresme and Franz Wenzel at Axa Investment Management. That's the highest ratio since Axa's data started in 1995.

"Cyclicals rebound when investors anticipate increases in profit, but we're still in a period of downgrades, "says Dautresme. But "the move has been too early". And the BDI is hinting that those cyclical stocks will also return to base just as quickly as they left it.

But it could be time for defensives to play catch up. Telecommunications, media and healthcare stocks have been the worst performers in the rally, say Axa. These are among the areas we like – for some specific tips, see our recent cover story False signs. And in the magazine recently, our Roundtable experts also chose nine tips that can outrun the recession (If you're not already a subscriber, get your first three issues free here.). But as for cyclicals, right now you should steer well clear.

http://www.moneyweek.com/news-and-charts/e...down-14902.aspx

Is this a reasonable explanaton of the situation?

Edited by MOP

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Seems to have peaked a couple of weeks ago and is falling back now.

http://www.wikinvest.com/stock/Baltic_Dry_...LDRY)/WikiChart

The only info I can find is this article in MoneyWeek:

http://www.moneyweek.com/news-and-charts/e...down-14902.aspx

Is this a reasonable explanaton of the situation?

That seems reasonable but I'm not yet convinced it is tanking. It's taken a dip but rebounded slightly. Too early to call a complete crash just yet. I thought the main reason for the increase was China stockpiling commodities, if they've filled their storage capacity it makes sense to see this come down again.

http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND

China still need to find a home for their soon to be worthess dollars though. They show no sign of doing the right thing and developing their internal market yet. I'd expect them to go on a buying spree of foreign production capacity. They're still to wedded to the export based economy model and the idea the West can take more debt.

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