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Published: September 9, 2009
The Baltic Dry Index (BDI), which measures the
price it costs to ship raw materials by sea, is falling again --
and fast.
The BDI isn’t a regular stock index like the S&P 500. It’s a
composite survey of daily shipping prices around the world. The
higher the reading, the greater the demand for shipping, and the
higher the price.
Many see the Baltic Dry Index as a key leading indicator for
global growth and production. This is because the index offers a
real-time look at global demand for raw materials. Unlike stock
and commodities markets, the BDI has no speculative players.
What you see is what you get. The only people who move the index
are those who have cargo to ship and those who have ships to
move cargo.
As you can see in the chart, the S&P 500 Index (in red on the
right axis) closely follows the BDI (in blue on the left axis).
This suggests the recent drop in the BDI will be soon be
mirrored by a drop in the S&P.
In August, the BDI posted a -28% drop, its biggest since last
October, when shipping rates were in a freefall. Since the index
hit a high for the year in early June, the BDI has fallen by
about -43%, from 4,291 to 2,462. Many see this number falling
further.
The reason for this is two-fold.
First,
China appears to be cutting back on
many of its raw materials imports.
China was stockpiling raw materials
when prices were depressed. Now, as
prices have risen, this buying spree
is slowing. In fact, Chinese
officials called for a reduction in
steel and cement production last
week. If they follow through, this
will not only weaken prices in the
input commodities, it could also
weaken shipping prices since a lot
less material will be shipped.
Second, many new ships are hitting the seas at a record rate.
During the past five years, about 300 new dry-bulk ships were
launched each year. This year, however, that number is expected
to be much higher. About 1,000 new ships are expected to begin
plying the high seas in 2009. And another 1,000 in 2010.
All this has some analysts saying the Baltic Dry Index could
fall another -50% or more this year. This is bad news for the
stock market because of the Baltic Dry's historical correlation
with the S&P 500, which could drop -25% if the trend continues.
-- Anthony Haddad
Staff Writer
StreetAuthority
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