Fall in Dry Shipping Index Threatens to Cast Commodity Market Onto the Rocks

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jan 2008

WITH commodity prices surging, it is a brave investor who sticks his neck out and calls a top to this booming market. China's rapid growth, and its seemingly insatiable hunger for imported raw materials - a major driver behind the recent boom in commodity prices - are not, after all, expected to slow in the short term. Prices continue to rise, and records continue to be smashed. Yet Julian Jessop, chief international economist for Capital Economics, a British consultancy, argues that a rapid recent drop in a key benchmark of shipping costs is now pointing to the end, or at least a deceleration, of the current bull market.  The Baltic Dry Index (BDI), which measures the global price for shipping dry commodities such as wheat, iron ore and coal, has collapsed by more than a third from a peak of 11,039 on 13 November last year; it is now 6,513. Jessop argues that long-run shifts in the BDI follow the same patterns as the price of many commodities; the BDI has sky-rocketed by about 270% since 2000, while the Standard & Poor's GSCI Agriculture Index, for example, has surged by about 130%. The latter has not fallen back in line with the BDI, but Jessop believes that previous performance strongly suggests it will. The most likely reason for the BDI's recent rapid decline is an oversupply of available shipping to carry dry bulk. Jessop acknowledges this, but argues that the oversupply is not significant; he believes it was caused by the temporary closure of some port facilities by Vale, the Brazilian mining company. Jessop also dismisses as "spurious" the argument that the drop in demand is due to the Chinese New Year holiday, which starts on 7 February: "The BDI began to weaken back in November and has not shown such dramatic savings at this time of the year before. "We don't want to go overboard on one indicator, but the slump in the BDI is consistent with other evidence pointing to a global slowdown, and suggests that the upward pressure on food price inflation may soon start to ease." The BDI does not move in parallel with all commodities, however: the index did not surge significantly until 2007, some time after major commodities began to rise. Also, as the BDI does not include oil, it does not closely fit with movements in oil prices. Over long periods, however, the index does broadly move in parallel with the direction of the wider commodity market. There have been other hints that the bull market in commodities could be hitting headwinds. According to the Bombay Bullion Association, gold dealers in India, an important market for the precious metal, are increasingly being deterred by record prices of $914 (Pounds 469, E631) and above, and have stopped buying. Then there are concerns about how slowing economic growth in major industrialised nations in the West will affect the commodity market. Emerging markets like China are likely to witness slower growth should Western economies like America fall into a recession; there will also be less demand for raw materials in the West. The heavy drop in the BDI is just one indicator out of many, most of which remain hugely positive. But the index's performance is of real interest to investors; in any bull market, it is crucial to guard against complacency. When an indicator starts to flash, pay attention.