Tony Daltorio, Investment U Research
Funny how bulls and bears can look at exactly the same data, yet come to completely different opinions.
Take the Baltic Dry Index, which measures charter rates for ships carrying bulk commodities, for example.
Bulls use a high reading as proof that worldwide demand is picking up, whereas bears see it in a more pessimistic light. And with the index down nearly 50% from its June 3 high, bears claim it shows the fragility of demand in China, which drives much of the global demand for commodities.
But I believe the Baltic Dry Index is a key gauge of global economic activity. And it begs two questions. What is it doing and how can we make money from it?
The Baltic Dry Index & China's Commodity Demand
The bulls and bears can say what they want to, but a closer examination of the Baltic Dry Index suggests that it isn't nearly as simple as either group would like to believe.
You see, its recent fortunes stem from a complex mix of factors, including Chinese demand for two key commodities – iron ore and coal.
Imports of coking coal into China rose to 12.6 million tons during the first half of 2009 – up from 1.1 million tons in the same period last year. Meanwhile, thermal coal imports hit 24 million tons from January through June, versus imports of 4 million tons in the same period last year.
That's quite a change. But not nearly as much as Chinese iron ore importers (a.k.a. steel mills).
According to Guy Campbell, Managing Director of the dry cargo division at Clarkson shipbrokers, China could very well import 550 million tons of iron ore this year – a significantly higher amount than last year's 444 million tons.
And he has good reason to think so. During the second quarter, importers created massive congestion at Chinese ports and rates for the giant, iron ore-bearing vessels rocketed from $17,000 a day at the beginning of April to $93,197 by early June.
Of course, demand has slackened since, taking port congestion and vessel rates with it. And this is where it starts to get tricky…
The Ups and Downs of the Baltic Dry Index
The Baltic Dry Index has undergone repeated ups and downs this year, in large part because of the vacillation in rates to operate vessels.
Other smaller cargo ships, on the other hand, have enjoyed smoother sailing.
