Baltic Dry Index: Signs of economic recovery?

Of course these numbers are bad and in the near future, the macro-economic environment will likely remain bad.

However, it is more important for us to judge where the global economy is heading, since this will influence the demand for oil.

One of the important leading indicators to watch is the Baltic Dry Index (BDI).

This is a benchmark for shipping costs of 'dry' bulk commodities like iron ore, copper and grains.

From the bottom in December 2008, the BDI has risen almost 200% to a current level of 1,900.

However, the peak-level of the index in 2008 was around 12,000 and the BDI dropped in line with the commodity severely.

Analysts referred to an increasing demand from, for instance, China which is the biggest consumer of the steel-making raw material. The Chinese are building supplies of iron ore to be able to execute their stimulus projects.

China announced in November a $586bn economic stimulus package running through 2010. This week President Obama signed into law a $787bn economic-stimulus package.

This plan is designed to save or create 3.5 million jobs and help pull the US out of the most severe recession in 70 years. These plans might on the long term result in a rising demand for oil.

Financial bellwether

Although it is too early and too difficult to draw conclusions from the current price developments of the Baltic Dry Index, it might give us a clue. If the BDI keeps rising in the coming months, this might point to a recovering economy.

Not for nothing several cyclical steel and mining stocks like ArcelorMittal, BHP Billiton and Rio Tinto showed spectacular gains in the previous weeks. Also it might be interesting to watch the freight vessel sector, which ship the commodities around the world.

Although oil (WTI) is under pressure (selling at approximately $38) because of the depressing environment, it is just a matter of time before it rises again.

The fact that oil will rise in the (near) future is almost certain, however it is more difficult to predict when it will happen. A structural increase of the Baltic Dry Index might give us a good sign and is better not to ignore.