Don’t get fooled by the Baltic Shipping Index part 2

Since I did the first “don’t get excited” post less than 6 weeks ago (see prior post “Don’t get fooled by the Baltic Shipping Index” May 4-09), the Baltic Shipping Index has more than doubled. Here’s what Fleet Street Invest says about the recent rally:

The Baltic Dry Index (BDI), a measure for shipping prices of dry bulk cargoes, had been enjoying a great run, clocking in gains for 11 weeks in succession. But we saw this as a direct effect of the Chinese hastily stocking up on cheap commodities. And the uptrend in the ‘trade gauge’ recently ran out of steam.

The index lost a record 92% during the onset of the credit crisis last year, when trade took a severe blow. Then this year, Chinese buying meant the BDI rocketed by over 125% from 15 April to 10 June.

But on 3 June, the tide started to turn again, with the BDI falling 20% in seven days. China has bought way in excess of actual domestic demand – and this is not sustainable. Already, 90 freighters carrying iron ore are lying idle off Chinese ports, because of a lack of storage facilities. As the pace of this stockpiling starts to slow, the BDI will fall.

What should we learn from the BDI? The indicator is a good one to watch since it predicts future global industrial activity ahead of official statistics, as producers need to buy raw materials in order to create final products.

The recent dip may look small against the rally in 2009, but it’s a very noticeable one over a relatively short period. And it clearly shows the impact of China’ buying spree, leading us to believe that shipping demand won’t hold up as China’s commodity shopping slows down.

We’re likely to see further plunges in the index until the global economic recovery really kicks in. The trade gauge could stand to lose most of its amassed gains from earlier this year.

Amen.

MRM