Sharp drop in Baltic Dry Index highlights slowing commodity demand
Recent highly volatile Baltic Dry Index expected to enter phase of lower volatility unless geo-political tensions were to flare up again.
Sharp drop in Baltic Dry Index points to slowing commodity demand
The Baltic Dry Index, the shipping and trade index produced by the London-based Baltic Exchange, provides a clear picture of the price of moving raw materials by sea and offers valuable insights into global supply and demand.
In recent months, the Baltic dry Index has been significantly impacted by a confluence of factors, including a severe drought disrupting major shipping routes and escalating regional conflicts affecting maritime trade.
A prime example is the Panama Canal, an essential conduit for global shipping, which in November faced drought conditions, forcing the canal to impose temporary restrictions on ship crossings. This bottleneck stymied trade flows and rippled through supply chains worldwide with the index surging by around 140% to its 3,346 early-December peak, an 18-month high.
In Yemen, the Iran-backed Houthi rebel forces have been battling a Saudi-led coalition for years. As the Houthis targeted commercial ships in the Red Sea, the US and Britain retaliated with airstrikes. This regional turmoil has disrupted vital oil shipments and rocked commodities markets.
Meanwhile, the flare-up in violence between Israel and Hamas forces in Gaza has also unsettled the shipping industry. With missiles being fired and airstrikes being launched, underwriters raised war risk insurance premiums for vessels passing through the Red Sea. Consequently, some shipowners avoided the region, causing shipment delays and rate spikes on certain routes.
Interestingly the December high in the Baltic Dry Index was made marginally below the December 2021 and May 2022 peaks at 3,369 to 3,423 before a sharp sell-off took it back to the 200-day simple moving average (SMA) at 1,520, more than halving the index’s value within six weeks as freight rates across vessel categories plunged to multi-month lows.
Baltic Dry Index Daily Line Chart
Lack of growth in China and Europe – with two of its main players, Germany and France skirting a recession - coupled with overcapacity in containerships has provoked the recent swift bearish reversal.
The Euro area has seen zero quarter-on-quarter growth in the fourth quarter (Q4) of 2023 and year-on-year only grew by 0.1% whereas China is plagued by its property sector bust and lacklustre demand.
The Baltic Dry Index is now being capped by the 200-day SMA which acts as resistance at 1,520 with it slipping towards its February-to-January support line at 1,350, marginally below which lies the mid-January low at 1,308.
Below it sits significant support between the June and September 2023 lows at 1,063 to 919. Above or within this support area the Baltic Dry Index would then be expected to level out, unless the global economy were to slip into a recession in which case the February 2023 trough at 530 would be back in sight.
Good resistance above the 200-day SMA at 1,520 can be spotted between the March to May 2023 highs at 1,603 to 1,640.
While the next higher October 2023 peak at 2,105 isn’t exceeded, the medium-term trend will remain bearish.
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