Forward-Looking Commodities Investing
When investing, it would always be nice to have a magic mirror. One that, with a few incantations and perhaps a sacrifice to Adam Smith, would show us the future. Nowhere would such a mirror be more valuable than in the volatile world of commodities.
Enter the Baltic Dry Index. While not a magic mirror, it can give you a glimpse into the health of the global commodity economy.
The Baltic Dry Index covers dry bulk shipping rates - the price of moving raw materials by sea. It tracks the prices for large ships carrying items like grains, coal, copper and iron ore. Since it tracks the movements of raw materials, it is a pretty good indicator of economic activity - no one ships coal they aren't going to use, at least eventually. And if you look at the BDI in the past year, you'd see a whole lotta shipping going on. The index itself is up nearly 100% in the last 12 months due to strong demand, port congestion (slowing the loading or off loading of the ships and creating delivery delays) and route changes that have extended shipping times.
The Panamax ships - the ones designed to go through the Panama canal - currently have a daily rate of $55,000 to $65,000 a day, depending on the delivery point. The larger Cape Size - those designed to go around Cape Horn or the Cape of Good Hope - range from $100,500 to $115,000 a day. (Go here for the latest data.)
The biggest user of dry ships is no surprise to anyone following commodities: our good friend China. Coal, copper, iron ore, grains - seems like all shipping lanes lead to China. But other countries need imports too, and not just coal. Drought in Australia has caused some Asian countries to look to the U.S. for grain, resulting in longer, and busier, shipping routes. In fact, according to the Financial Times, some grain routes have doubled their "transit volume in the past year," which is helping to push freight costs up.
All this competition for cargo space is starting to impact food prices, and so importing countries are starting to look for alternatives. Nobody is going to stick wheat onto a 747, so their only real choice is container ships: those bulky things that carry the metal boxes that you see lining the upper reaches of the New Jersey Turnpike.
Taiwan has been using them for the past seven years to import commodities from the U.S., and others (most notably India) are now joining them. The main challenge for the ports is going to be dealing with the 3,500 containers it takes to equal just one Panamax ship - it takes a lot of effort to load and unload containers, compared to the relative simplicity of just filling up a ship with conveyor belts. If the port can handle it, real economies may be had, at a time when ship brokers are predicting further price increases as we approach peak shipping time for various cargoes such as coal and grains. But don't worry, the large dry bulk ships are still the way the majority of the world is going to move their coal, iron ore and grains across the ocean, so this obscure index is still worth paying attention to. It's a great mirror for watching world demand.
Source: www.hellenicshippingnews.com
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