A little bit on Baltic Dry Index

My friend just called "Why are you so sure that this current rebound in commodity is different. Just look at the chart, there were rebounds in August, September, October and November, the current December rebound is still moved within the down trend channel, no breakout, why can't it moves south in January 2009 ?" To answer him I have to talk a little bit on Baltic Dry Index (BDI). What is this BDI ? BDI issued daily by the London based Baltic Exchange is a daily averages of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. It measures the demand to move raw materials and the supply of ships available to move the materials. BDI offers a realtime glimpse at global raw material demand. Unlike stock and commodity markets, BDI is totally devoid of speculative players as trading is strictly limited only to the member companies of Baltic Exchange that have actual cargo to move and that have the actual ships to move the cargo.

Look at the two charts I copied from Bloomberg. The top CRB commodity chart and the bottom BDI chart. The peak for BDI at 11,600 was in June and the peak for CRB at +30 was in July, CRB is lagging behind BDI by one month. By July the transportation rate as measured by BDI has dropped from 11,600 to 9,000 (22% drop) when commodity was at the peak and was projected to go higher. BDI can be treated as a lead indicator for economy. By early November, that was two months ago, BDI was at 790 (from 11,600), it has dropped 93%!!! But since then it has dropped only 2% from 790 to 774 before Christmas. From the chart, it was a sideway movement since November (2 months) whereas CRB (the green line) from November at -25 has continued to drop until early December to -42. Similar to the peak, CRB bottom (if it is a bottom) was lagging behind that of BDI by a month. In the last two months BDI was holding very well indicating that supply and demand of ships is almost balanced. At this point please remember one thing, the supply of cargo ship is generally very tight and inelastic. It takes 2 to 3 years to build a ship. A marginal increase in demand can push up the index very quickly, that is why it is a very good lead indicator. It is likely that BDI will move up one month ahead of CRB. Tomorrow if I have time and not lerthargic, I will try to put up a review for 2008. Happy New Year, wishing all of you a 888 2009.