The Baltic Dry Index and TSX Venture continue to march higher and if you’re long junior mining stocks, tracking the BDI should be a priority. We were early to this party and warned as early as March of 2016 that the bull market on the TSX Venture was being led by the Baltic Dry Index. I will explain why shortly…
Baltic Dry Index predicts Commodity Demand Cycles
First off, the BDI is a great barometer of real demand for commodities because it tracks the price of shipping raw materials, including metals, grains, and fossil fuels.
Last week, the shipping industry was shaken to the core after Hanjin Shipping announced bankruptcy protection. If you live anywhere near a railroad or port city you have seen Hanjin Shipping containers.
image source: http://www.wsj.com/articles/billions-in-cargo-remains-stranded-at-sea-14…
According to the WSJ, there is as much as $14 billion worth of cargo stranded at sea. Estimates have put more than half a million cargo containers on dozens of ships being denied access to ports due to uncertainty surrounding docking fees, and other costs associated with unloading, according to the WSJ.
This event has reminded many nations of the world how important it is to have access to secure, raw materials. This is providing a boon to many junior resource stocks, particularly precious metals issuers in recent weeks. While the rally on the Venture has been centred on gold, silver and lithium issuers for the most part, an event like this could spur a more broad-based rally in commodity issuers.
Baltic Dry Index surges as Cargo Owners Panic
As cargo owners rush to secure goods, to avoid seizure and thereby make safe delivery, it’s surprising the Baltic Dry Index hasn’t gapped up even further.
Baltic Dry Index – 1 Month Chart
chart source: http://www.bloomberg.com/quote/BDIY:IND
This is fueling price increases in shipping, which will drive the cost of commodities up, not down.
TSX Venture and Baltic Dry Index Deeply Correlated
In March of this year, we sounded the alarm, in a report titled What’s Behind this TSX Venture Bull?
“Obviously, demand for raw materials is closely tied to economic activity. When demand perks up, shipping prices increase, sometimes even before commodity prices do. For these reasons, the Baltic Dry Index has long been thought of as a leading indicator for economic recessions and commodity bull markets. It accurately forecast the past three major market crashes, including 1987, 2000 and 2008. In 1986, the index hit its first all-time low; in 1999 it hit a 12-year low, and then in 2008 it fell from above 11,000 to roughly 780. After rebounding to nearly 2,500 at the beginning of 2014, the BDI hit a new all-time low of just 290 this February.”
Click here to read more.
So, now you know how accurately the Baltic Dry Index has been in predicting market crashes and economic activity. We knew February’s lows simply could not last and reported in March that:
“The Baltic Dry Index climbed to a 5-week high of 396 last week, “as some market players expressed intentions of acquiring tonnage at 30-year low prices…” according to Ship and Bunker.
Seanergy Maritime Holdings is one of those companies…
Stamatis Tsantanis, Seanergy Maritime’s Chairman and CEO, stated:
“We firmly believe that current market conditions represent a unique opportunity to acquire quality tonnage at 30-year historical low prices. For that reason, we intend to pursue acquisition opportunities that we believe can further enhance value for our shareholders.”
source: http://shipandbunker.com/news/world/141909-baltic-dry-index-edges-up-to-396-as-players-prepare-for-market-recovery
Click here to read What’s Behind this TSX Venture Bull?
Zero Hedge reported on the Hanjin story as well, citing comments from Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen, who exclaimed, conditions are “bordering on chaos”…
“Jensen added that 43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.”
Click here to read “It’s Bordering Chaos”: $14 Billion In Cargo Stranded At Sea, Crews “Go Crazy” On Hanjin Ghost Ships.
The Baltic Dry Index has more than doubled in 2016 from a low of 290 to its high of 773 today. The TSX Venture is up over 75% from its January 20th low. Watch the Baltic Dry Index this month, if it breaks above 800 and heads towards 1,000, you can bet the TSX Venture won`t be far behind.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
