Shipping Ahoy

14/10/2011 at 4:01 pm

Commodities, like equities, were having a rough time until recently. The S&P GSCI price index closed last quarter down 12%, and remains 18% below its high of the year. Pretty much everywhere you looked – oil, gas, industrial metals, precious metals – prices were falling. One or two of the soft commodities, such as cotton and rice, went sideways or posted modest gains. But almost everything else was having a terrible time.

Almost everything – except freight.

The Baltic Dry Index is a measure which tracks the price of shipping dry bulk cargo. This means coal, cereals, ores: anything which isn’t oil, liquid gas or containers. The Baltic Exchange in London, which publishes the index, estimates that such cargo comprises two thirds of seaborne trade. In their view, dry freight prices are driven by six factors: fleet availability (supply), commodity demand, seasonality, fuel prices, threats to choke points like Suez or Panama, and sentiment among freight market participants.

The last point touches on the key distinguishing feature of this index. Unlike oil, or copper, or gold, the price (or future price) of shipping capacity is not traded on financial markets. So there are no flows of speculative or investment capital to distance the index from its fundamentals.

And in the third quarter of this year, the Baltic Dry Index rose by 34%. It has put on over 13% since. In other words, the cost of transporting the greater part of the world’s raw materials – as negotiated solely by those involved in the trade – went up, and did so dramatically. This suggests a robust upturn in global activity – something which would put the world economy miles away from what the bear consensus believes.

As ever, there are caveats. The Baltic Dry is a volatile beast: it fell from a high of over 11,000 in May 2008 to a low of 663 later that same year (it now stands at 2,155). It is subject to a high level of distortion from events such as last winter’s flooding in Australia which have a significant short-term impact on the demand for freight while saying nothing about the behaviour of the world economy. And claims for its predictive power as an economic indicator stand up better over some periods than others.

Even in context of the stronger-than-expected economic data we have occasionally seen of late, therefore, it would not be appropriate to over-exaggerate the importance of this one indicator. The plunge of the exchange traded commodities might yet be proved a more reliable guide to the future. But the distance of the Baltic Dry Index from financial market sentiment makes it worth watching, and its sustained, rather contrarian rise over the last couple of months is interesting to say the least.


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