Hard Indicators signal possible downturn in global economy

June 29, 2010 12:05 pm

High grade copper futures (front month) at the Commodity Exchange in the US, rose more than 150% from the beginning of 2009 until April this year. However, after reaching the peak-level of this year, copper prices fell more than 25%. To conclude that the economic recovery is over would be a bold statement, however this price development might give us a warning signal that a severe storm is ahead of us. The oil market for instance fell more than 25% in May. Although oil managed to recover some 15% in the last few weeks, the possibility for a new down leg is far from over.

Another ‘hard’ indicator for the health of the economy, the Baltic Dry Index (BDI) fell almost 40% from the peak in May 2010. The Baltic Dry Index is a number issued daily by the London-based Baltic Exchange. This index represents the worldwide international shipping prices of various dry bulk cargoes (such as grain, rice and iron ore). The BDI comprises 26 shipping routes measured on a time charter and voyage basis, among of those the Baltic Sea route.

The BDI covers Handymax, Panamax, and Capesize dry bulk carriers which represent 18%, 20% and 62% respectively of the dry bulk traffic in the world. Capesize vessels are typically above 150,000 long tons deadweight (DWT), including oil tankers in the Very Large Crude Carrier (VLCC) and Ultra Large Crude Carrier (ULCC) range. It is more common to mention “capesize” ships to describe bulk carriers rather than tankers. A standard capesize bulk carrier is 175,000 DWT, although larger ships are able to carry up to 400,000 DWT. The mammoth ultra large crude carriers or ULCC’s carry up to 550,000 DWT. These tankers yearly move approximately 2,000,000,000 metric tons of oil every year.

Now, back to the commodity shipping costs measured by the Baltic Dry Index. This (leading) indicator extended its longest losing streak in 14 months because of an expanding surplus of vessels and declining Chinese imports of iron ore and coal. Growth in China, the world’s biggest consumer of both commodities, will slow to 10.5% this quarter and 9.6% in the following quarter. In the first three months, according to analysts, Chinese economy grew 11.9%. Chinese’s coal imports dropped 11% in April and almost 19% in May. Imports of iron ore, fell more than 6% in both months, which were the first back-to-back monthly declines since the middle of 2008.

A few charts have been included to illustrate the price developments of WTI Crude oil and BDI. Those charts do not show any recovery yet. As long as these indicators stay under pressure, a recovery of global economy is not likely.