Baltic Dry at 1500 – what is it telling us?

I know we have the charting equivalent of a man crush on the Baltic Dry Index (BDI) at the moment, but it is such an important chart for anyone with the slightest interest in the health of the mining sector. And as regular readers of SpreadBet Magazine will know, if we have a bit of a man crush on the BDI then we are downright obsessive stalkers of miners!

To remind you, the BDI tracks 23 of the world’s busiest shipping lanes. Thanks to the dynamics of the shipping industry the BDI is extremely sensitive to increases and decreases in demand. This makes the chart prone to fairly extreme spikes. It is one of the purest indicators of global economic activity around and has been an excellent leading indicator for mining stocks in the past. The reason for this is because the overwhelming majority of raw materials are still shipped by sea. Therefore, it stands to reason that the more that is being shipped by sea the more materials mining companies are selling; simple really.

So what does the BDI have to tell us today?

The answer to this all depends on whether or not you are a glass half full or glass half empty type of person. In the last 3 weeks the BDI has dropped just over 25%:

Inevitably this will cause some to question the health of the apparent global economy. After nearly 2 years at or below 1,000 the BDI reflected how persistently dire the economic situation has been, despite the claims of certain central planners and their heavily manipulated statistics. The sudden rise in the summer was cause for celebration, as this index regained levels that coincided with substantially higher prices for mining stocks.

Given how badly pummelled the mining sector has been a recovery in the BDI should be the precursor for a substantial rally in miners.

The glass half-full view of the BDI is that the latest pullback has stopped at a crucial level; 1500.

If you look at the chart over the last 15 years (sorry we only have a 5 year chart, which we can publish), you will see that 1500 on the BDI represents the minimum level for global growth. The latest debt ceiling debacle is bound to have put a dampener on global sentiment, so it seems no coincidence that the BDI started dropping as the latest squabbling between Congress and the White House reached its conclusion.

What happens next is likely to be extremely important.

Our view remains that the mining sector represents a generational buying opportunity at the moment. So far, the BDI still supports our view. Assuming it holds and rises from the 1500 level expect to see significantly improved corporate performance in mining stocks from January 2014 onwards. However, if the BDI falls from here, then there could be further difficulties still in store.

Thankfully though, as mentioned above, the BDI is so responsive to changes in supply and demand it will give traders ample warning for which way the wind is blowing. 

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