Copenhagen, Denmark.

Is this index for real?

This morning I’m on the way to meet Jyske Bank Private Banking in beautiful Copenhagen. The flight is just under an hour from Oslo so I won’t be bothering with bags or anything to check-in – exactly how I like to travel for day trips.

Denmark is about a lot of things but especially shipping. And the biggest company on the Copenhagen Stock Exchange is Maersk A/S, a formidable global container shipping company that’s easily recognizable the world over.

Since collapsing a spectacular 97% from its all-time high last year the Baltic Dry Index (see chart below) has managed a pretty impressive rebound. After hitting a low in December the index has surged more than six-fold as rising demand for raw materials in China leads to a recovery in rates charged by Cape-sized vessels.

Day rates for Cape-sized vessels, which transport iron ore and coal, have risen sharply in recent weeks; rates have more than doubled from $22,000 at the beginning of May to $57,000 on May 28.

With the Baltic Dry Index soaring over the last five months it’s no wonder the commodity bulls are coming out of hibernation. Like copper, the Baltic Dry Index acts as a leading economic indicator for the world economy and broad-based commodity consumption.

But is this index ahead of itself considering the state of the global economy and the likely sluggish recovery that lies ahead following the biggest boom from 2003 to 2008?
I would have to argue that the Baltic Dry Index is way ahead of itself and the fundamentals supporting the global economy and the state of shipping.

Shipping rates might be enjoying a dead-cat bounce since December. Yet it would seem logical that day rates are likely to decline again later this summer or fall as new shipping tonnage hits the marketplace.

The South Korean shipbuilders – the world’s largest -- were overwhelmed with new contracts until mid-2008 when the global economy fell off a cliff; that new supply is coming soon. That alone won’t help shipping rates as a supply glut hits industry.

As for China, it’s naïve to believe her economy will enjoy another pre-2008 boom or recovery. I have serious doubts about the sustainability of China’s demand for iron ore or steel in mid-2009. Also, the outlook for shipping rates will depend on how quickly the congestion outside China’s ports eased.

Commodities, the Baltic Dry Index and natural resource currencies are posting some big gains since March. Judging by the big rally in bulk carrier day rates and crude oil prices this just might be the beginning of a new bull market for raw materials. But considering the significant damage caused by the collapse of bank lending, credit and global consumption, I’m also wondering if this is just a bear market rally or the real thing? I tend to believe it’s the former.