Monday, September 8, 2014

Baltic Dry Index: What BDI reveals about commodity prices

Baltic Dry Index ($BDI) is considered a leading economic indicator.From Wiki:

Why economists and stock market investors read it[edit]

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and a ship's fixed costs are too expensive to take out of circulation the way airlines park unneeded jets in deserts. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..."[6] The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.[7]

Every time, since 1985, BDI was near or under 500 levels (Rock bottom levels for BDI,even during 2009 when oil prices collapsed and new ships were entering service) that signaled a major bottom for commodities index(CCI)

Zooming in BDI chart

We can see that BDI has probably bottomed out at 500 (meaning that commodities index ($CCI) has also bottomed at 500) and in order for commodities to have a substantial rally, we need to see Baltic Dry Index above the thin black resistance line, preferably with an RSI reading of 65 and above.