Jumping Ships

19/09/2013 at 5:35 pm

Two years ago this blog noted anomalous behaviour from an indicator which receives relatively little attention: the Baltic Dry Index. Tracking the price of shipping dry bulk cargo (and thus excluding oil, LNG and containers), it has bounced by 61% so far this month. If that level can be sustained it would represent the biggest monthly rise since May 2009. To recap from the dark days of autumn 2011:

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.

A 61% rise over thirteen trading days shows just how volatile the index is, but it can still be useful. In the second half of 2011 for instance, its rise coincided with what turned out to be sharp growth recoveries in the US and Japan. This ran counter to the grain of market fears at the time, to say the least – some were still expecting Italy to default, and downward revisions to US GDP data had been largely responsible for kicking off the summer crash. A few months later, however, Europe re-entered recession (along with the UK as it was thought at the time), Chinese demand slowed and the Baltic Dry Index slumped lower again.

Markets are not so suicidal as they were a couple of years back, but they have still been sending some mixed signals. The developing world is confident that surer recovery will deliver buoyant earnings, for instance – but emerging markets are thought to be immune from this. The Shanghai Composite is down 3% in price terms for the year to date, while the S&P 500 is up 21%.

And yet reading coverage of the shipping market (e.g., e.g.), it is clear that the key driver of the rise in the Baltic Dry so far has been demand for iron ore and coal from China. With Europe recovering, as well as the domestic property market, it seems unlikely that this is a freak event. And for what it’s worth, Bloomberg data shows that reported earnings for the Shanghai Composite index have risen more quickly than they have for the S&P 500 this year, and are forecast to continue to do so.

As ever it does not do to get too excited, especially by a solitary measure. In the commodity space itself, base metals prices have yet to present a similarly clear indication of a rebound in activity for example.

But there is something to be said for 61%.


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