A recent article in the Financial Times indicated that the world’s largest commodity trading houses have turned upbeat on economic growth, signaling firmer raw materials prices in the second half of the year.
After peaking at 615 in July 2008, the CRB’s Continuous Commodity Index fell 48% to a three-year low in December before beginning a rally that has been driven by demand from China and speculation that the world economy is set to recover.
Strength in commodity prices is a strong sign that demand around the world is picking up, though some of the increases may be traced back to speculators who are also betting on a global recovery.
Much of the economic data in the U.S. are flashing green, and China’s GDP took off in 2Q, but not all forward-looking indicators are signaling a global recovery is at hand.
That brings us to the Baltic Dry Index. The Baltic Dry Index tracks shipping rates for various dry bulk cargoes, which includes many raw materials.
Not surprisingly, shipping rates are based on supply and demand.
After peaking at nearly 12,000 in May 2008, prices literally collapsed, and the Baltic Dry Index settled around 670 six months later, or a whopping 95% drop in prices!
Clearly, the magnitude of the drop underscored the severity of the global recession in manufacturing that followed the demise of Lehman Brothers and the seizing up of credit markets.
Prices rebounded nicely as China resumed the importation of raw materials, but after peaking in early June, the Baltic Dry Index is 40% off its peak.
The decline suggests a note of uncertainty is in the air because the index is difficult to manipulate. Moreover, weakness in shipping rates for raw materials may be signaling sluggish demand, which may be a sign that the rally in commodity prices could stall.
Whatever the end result, the drop in the Baltic Dry Index bears watching.
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