China Olympics And The BDI

The Baltic Dry Index or BDI is a measure of shipping demand of bulk ships in the world. The rates fluctuates according to the demands of the services of dry bulk ships.

The BDI can also be used as a gauge to measure the world's economy as demands for iron ore for steel production, coal for energy production and also dry commodities for various consumption all points to whether the economy is growing or not. Increased in trade means higher bulk rates but has to discount the supply of ships as well.

Now I've been monitoring the BDI on and off since my interests in Maybulk. But as the BDI slowly slide from it's peak again for the 2nd time, Maybulk shares has also more or less mirrored the BDI and started to decline in May from a high of RM4.40 to the current RM3.70 range. Since August is also the month Maybulk will likely report it's last financial quarter result, a small dividend has to be factored in to the current price range.

Correlation

Now what do the Olympics in China has anything to do with the BDI? If trying to figure out a direct association would be that China's Olympic would need massive infrastructure would in turn need massive supplies of iron ores which might affect the BDI rates. Yes, that has already past. The Olympics is less than a week away and China won't be building anymore stadiums for the moment.

But as many local and international media have been reporting, China more specifically Beijing has been a regarded as one of the most polluted Olympic city in sporting history. So to combat their hazy skies and choking smog, they effectively shutdown all nearby industries and halve the usage of cars in the city. This has led to significant improvements to the city skyline and blue skies can be seen again from the ground in Beijing.

Now thinking of all the factories which includes steel mills have been shutdown by the government, wouldn't it have an effect on the current BDI prices. Or has it been already been factored in as the announcement to shutdown the factories has been made well in advance and only started on the 20th of July 2008.

Looking at the chart for the BDI, it peak at 11793 points in May and started it's decline throughout June and now stands at about 8341 points. Now if I was a steelmaker and the government orders me to stop work from next month onwards, wouldn't it be wise of me to ramp out production and stockpile my products before I shutdown. This is ensure I have an inventory stockpile. And since I won't be making anything next month, I would probably cancel all my raw material orders as well. Well at least this is how I would think. This will allow me to still sell my products when I'm not producing and I will not have any stockpiles of raw materials for the coming month I'm not in operation. IMO anyway.

Conclusion

The BDI peaked in May and started its decline in June, about one and half months before the scheduled shutdowns of plants around Beijing. At the moment, heavy industries around the area are still shut and would stay shut until the Olympics concludes which is at the end of August. So for this theory to be true I reckon after the Olympics in September, the BDI should start climbing up again to show the demand for raw materials have returned.

So if I was a betting man, I would place my bets on the shipping companies that recently got battered due to the decline of the BDI which may recover in September as factories and steel mills around Beijing goes full swing again.

It must be said though, that these rates are historically high by itself even at the current 8000 points range. So it would be quite optimistic to actually think the BDI can maintain this high. And the fact remains that I have no idea how much demand or raw materials the industrial area around Beijing actually requires.