*If expectations about future demand change and producers reduce their raw materials demand then the BDI will drop
*An unconditional signal that the current sharp decline in BDI is an overreaction
The Baltic Exchange Dry Index fell to 2,759 on Monday, extending losses for a third straight session, pressured by weaker rates for capesize and panamax vessels. The capesize index, which tracks iron ore and coal cargos of 150,000-ton, shed to 3,752, its lowest level since Nov. 9. The panamax index which tracks cargoes of about 60,000 to 70,000 ton of coal and grains, decreased to 2,930, the lowest level in five months.
The BDI continued to rise – and to foreshadow increases in consumer prices. That is until Oct. 7, when it reached a lofty 5,652, its highest level in more than a decade. Since then, the BDI has declined by 57% and recently hit its lowest level since June, tracking a decline in global shipping rates. That’s led some, to suggest the final two months of 2021 could see inflation ease.
Index is expected to trade at 2918.72 points by the end of this quarter, according to analysts’ expectations. Looking forward, we estimate it to trade at 3281.38 in 12 months’ time. The major factors impacting the BDI are commodity demand. This is mainly a volume impact that could be irrespective of commodity prices. If expectations about future demand change and producers reduce their raw materials demand accordingly, then the BDI will drop.
Meanwhile, the supramax index rose to 2,259, ending a 15-session losing streak. For the week, the Baltic Dry Index rose 3.4%, the first weekly gain in five, helped by stronger rates for the larger capesize vessel segment. Iron ore prices were on track for a fifth straight weekly fall on Friday, as worries over weak demand for the raw material in top steel producer China.
Average daily earnings for capesizes, fell $698 to $31,113. The panamax index fell to a five-month trough of 2,850. It registered a 4.6% weekly decline. Average daily earnings for panamaxes, was decreased $723 to $25,647. The supramax index gained 6 points to 2,259, ending a 15-session losing streak. The index decreased 6.7% last week.
It follows that the supply chain is still operating inefficiently and will continue to do so in the coming quarters - an unconditional signal that the current sharp decline in BDI is an overreaction, not caused by the reason the media is trying to "sell" us. Secondly, we must understand that BDI is not just an indicator of the dry bulk shipping costs, but also an important barometer on the volume of worldwide trade and manufacturing activity.
There is only one reason why it has fallen so much in the last few weeks - a drop in demand from China, which started with a rise in the prices of key raw materials (iron ore, coal, etc - transported by dry bulkers). This background was overlaid by the situation with Evergrande and the doubts about the development of the Chinese economy because of all that was happening in general. I believe iron ore prices have corrected too much.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 16-11-2021