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Baltic Dry Index, AMEX Oil & Gas & Commodities Prices – July 2012

July 4th, 2012 · Greg Atkinson · 17 Comments

As we enter a new financial year it’s a good time to step back and look at some global economic indicators to try and get a grasp on any trends that might be emerging. Are there some signs of economic life out there or any hints of a global economic recovery that might help stock market investors some hope for the second half of 2012?

Firstly let’s look at one of my favourite indicators – the Baltic Dry Index (BDI).

Baltic Dry Index (BDI) – 1 year price chart

baltic_dry_index_july_2012

Source: Bloomberg

A few weeks ago I attended a two day shipping industry summit in Shanghai and the mood was decidedly downbeat.  The president of a Chinese shipyard for example said he expected many shipyards in China not to survive the current downturn in the sector and mentioned that some yards were even taking orders at a loss.

What was more of a surprise to me was that shipping company executives from Asia & Europe stated that there was still a surplus capacity of around 25%  across the world’s merchant shipping fleet.  As a result, supply & demand fundamentals had dragged down the BDI in the last 12 months to almost the lowest level since its inception in 1985 & shipping lines the world over are struggling.

Since around 90% of world trade by volume moves by ship, this does not bode well for the global economy for this year but perhaps during 2013 the shipping market might start to recover.

At the moment the Baltic Dry Index is just above the 1000.00 USD level – well below the 52 week high of  2173.00 but thankfully clear of the 52 week & multi-year low of 647.00.

If the BDI is around 1500 or higher near the end of the year then that would start to give me some confidence that the shipping market is beginning to recover and that we might see the global economy stabilize in 2013.

Remember – “keep an eye on the BDI!”

Next let’s have a look at how the oil & gas market has been faring.

S&P/ASX 200 verus AMEX Oil & Gas Index  – 1 year price chart

xjo_xoi_charts_july_2012

The chart above shows the AMEX Oil & Gas Index (xoi) plotted alongside the S&P/ASX 200 Index and as you can see there is a pretty tight correlation between the two.

Oil & gas prices have been moving around quite a bit over the last twelve months as investors react to global economic developments and geopolitical tensions in the Middle East.

At this stage it’s difficult to read much into the chart above since I can’t see any clear trend either up or down.  There is also a huge amount of LNG supply planned to come online over the next few years so it’s hard to see LNG prices soaring to new highs any time soon, although oil prices will get a boost if supplies from the Middle East are disrupted.

Now to get the big picture view we can look at a chart of commodity futures.

Commodity Futures Indexes – 1 year chart

commodity_futures_july_2012

The chart above shows the movement in prices for the following commodity indexes: UBS Bloomberg CMCI, S&P GSCI, RJ/CRB Commodity & Rogers Intl.

Generally speaking prices for most commodities have been falling over the last twelve months although they have been give a boost recently since the Europeans appear set to borrow & spend again.

However I don’t expect we are on the verge of a major rally across the commodities markets and reckon that coal & iron ore for example, have further to fall this year.

If that happens it will be bad news for commodity export dependant economies like Australia & Canada, but it will be good news for the world economy in general.  A period of lower commodities prices is just what is needed to help get the global economy back onto a more sustainable growth path.

Finally let’s look at gold prices in Australian dollar terms.

Exchanged Trade Fund (ETF) Gold – 1 year price chart

etf_gold_1_year_chart_jul_2012

I am not a gold trader or investor at this time so I will refrain from writing too much about the chart above. I have simply posted it here because the ASX Listed ETF GOLD is a good indicator of the gold price in AUD terms.

Clearly the run up in the gold price from early July to August 2011 could have made some short-term gold traders happy, but since then the price has drifted back down again.

Where will gold prices be at the end of the year? Well I’m a gold bear and expect gold prices have further to fall but I know plenty of people are still bullish about the prospects for gold prices, so I welcome them to share their views in the comments area.

In summary the economic indicators above suggest that the global economy is still struggling and that there is no clear sign yet that a recovery is in progress. However the Baltic Dry Index may be in the early stages of a longer term recovery & that is something I will be watching closely over the next few months.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


17 responses so far ↓

  • 1 Stillgotshoeson // Jul 4, 2012 at 3:33 pm

    I can see no fundamental economic reasons for (most) commodities to rise in value at the moment. More money printing will cause a rise, but this will not be sustained.

  • 2 BP // Jul 4, 2012 at 4:43 pm

    Well, commodities won’t rise at all, then!~ 😉

  • 3 Greg Atkinson // Jul 5, 2012 at 11:20 am

    Most commodities have had a good run & I believe we are seeing prices fall back to more sustainable levels. I am not quite sure why some people seem to think that the mining sector is exempt from cycles but without a doubt, too much capacity will end up coming on line just as it has in past cycles.

    A few years ago we were in the midst of the peak oil frenzy. Back then oil was ‘sure’ to pass $200 a barrel because supplies were running out and China couldn’t get enough of the stuff.

    Now we are currently in the stage of the cycle where prices have fallen but the quick turnaround in prices stories are doing the rounds. However looking at the share prices of BHP & RIO is doesn’t look like many investors are buying into that view..for now at a least.

  • 4 Lachlan // Jul 5, 2012 at 6:44 pm

    My gold position is bullish Greg but that’s a longer term view. The short term is hard to pick, it is technically bearish in shorter frames but we are still bumping around in a decent support zone so a neutral call looks wise. US gold is not the same. A better case for downside there.
    I cannot see how this market situation can be resolved to the nominal upside for a multi year bull run without one of the following

    *The people who control this planet give up and leave for a new world in outer space. We deleverage uncontrollably to a stable point. Many people suffer badly during the transition. A recovery eventually completes and eventually somewhere returns the inflation process. Suffice to say, I am not a deflationist in this sense.

    * Authorities give up and print trillions and trillions maybe even non debt based printing because all rules are eventually ignored. The current status of daily monetary inflation morphs in to a price inflation (apart from the cost push type we see presently). We may go to war since somebody will be very miffed and anyhow war is what humans do when their toast is burned.

    * Authorities collaborate on a global scale. Debtor nations settle in some form with their creditors(that begs more questions again) and cut government spending hard in many areas. The derivative problem is addressed. A new monetary system probably created unless the US and Europe can keep their populations controlled for a period while they get back to work and begin to reverse trade deficits/imbalances. Sounds unlikely maybe? I am just saying it is one way.

    The solutions we are seeing to date are not sustainable solutions but just financing loan repayments and other obligations with larger loans. My own opinion is that the west will have an acute devaluation. Measures are already being taken/have been taken to keep people from going nuts. I don’t think Australian mortgages will go underwater like the US and Europe. The government will spend and legislate first having more room to do so here, although we would likely have a shock of some nature to precede such an act.

  • 5 Lachlan // Jul 5, 2012 at 6:48 pm

    I am not saying imo some mortgages will not go underwater. Just not a (non mark to fantasy) 50% type of underwater.

  • 6 Lachlan // Jul 5, 2012 at 6:57 pm

    Option #three is a devaluation proposal in real terms for debtors (not just #2).

  • 7 BP // Jul 5, 2012 at 9:26 pm

    Another option: “The more things change… “

  • 8 BP // Jul 5, 2012 at 9:27 pm

    …or if you believe in _major_ drama 😉 :

    http://www.marketwatch.com/story/10-explosive-bubbles-that-will-kill-capitalism-2012-07-03?pagenumber=2

  • 9 Greg Atkinson // Jul 6, 2012 at 6:00 am

    Lachlan perhaps the U.S. and European economies will just struggle along for the next 5 years while Asia gets down the business? Many Asian nations are now focused on their own region for growth and view Europe & the U.S as large markets, but with low growth prospects. So as long as Europe & the U.S economies don’t implode, it probably doesn’t matter in the long term if they slowly becoming less of a driver of global economic growth right? (which is happening now anyway)

  • 10 Lachlan // Jul 6, 2012 at 7:07 am

    Another option: “The more things change… “

    I agree that things can roll on without changing longer than most think BP. It is a constant theme. My question is though, can we have strong nominal gains in asset prices while we are continually addressing solvency issues via ZIRP/gov debt purchase and various other schemes.
    There has to be a regime to inflate those and other debts away (or default) first is contention. It seems to me that the BRIC nations are positioning to ride that scenario out.

  • 11 Biker // Jul 6, 2012 at 10:40 pm

    Lachlan: ” …can we have strong nominal gains in asset prices while we are continually addressing solvency issues…(?)”

    You, more than anyone else here, seem to have understood the role inflation plays in this unfolding drama, Lachlan. Inflating debt away has been the _major_ factor in our family’s wealth-building efforts. The more shallow perception is that negative-gearing has been the key. Yes, tax benefits have helped, but inflation has really written off major debt.

    To put that in some kind of perspective, I retired on 59X my original graduate salary. I still own a half acre of beachfront I bought soon after graduating… for the same price as a TV set: $550.00. At the time I bought it, it was a quarter of my before-tax salary. There are _still_ similar opportunities for those who can discern value…

    Property bears argue that it’s folly to chain yourself to 30-year debt. In a way, we agree. We paid off properties _annually_ in the early days. Cynics will respond that things were cheap, but wages were subsistence level. We simply assigned the very highest priority to not only acquisition, but also debt reduction. No flash cars, an ability to tolerate severe deprivation in isolated conditions (no shops) for years-on-end; no media of any kind (no radio, TV, etc); but a recognition that we wanted complete independence in retirement, freedom to travel, an asset base to last a lifetime.

    Enough history. We really haven’t seen much change in four decades or so. Major changes? Salaries, property values, and rents have all risen appreciably. Interest rates? Up-and-down.
    Inflation? You can count on it. Any deflationary blips will be short-lived. The mistake these days would be to believe there’s a fast route to wealth and independence. A very small percentage of Aussies might be able to achieve that legally. The greater percentage are mug punters… .

  • 12 Lachlan // Jul 7, 2012 at 9:18 am

    I have no personal aversion to debt in the right context BP although I am not leveraged up presently. I am designing a property proposal for myself that I could use right now and for 5 years or so and then rent out. An industrial shed with a slab to hack semis or heavy tractors (thinking of other peoples needs in the future on that one)… I want it for drying, cleaning and storing seed. On some acres surrounded by sorghum and other crops (heavy scrub soil), a large, busy, regional centre within 15-20mins. Large mining areas 30-90mins away.
    So as time goes by I should develop a diverse portfolio of hard asset investments (inc income) and some shares. I am not going to sell into a deflation. Long term investing sounds good to me esp in Oz.
    Caveat…I am interested in protected myself from upward rate movements however…just in case.

  • 13 Biker // Jul 7, 2012 at 9:58 am

    Sounds worthwhile, Lachlan. A really good accountant might be able to help you in formalising and structuring the taxation situation… .

  • 14 Lachlan // Jul 7, 2012 at 1:40 pm

    I believe I need to get levered to some extent.
    She (accountant) will be helping me no doubt at all but I have a lot to plan first since I have only just starting articulating and costing my plan this week gone. This is a diversion from my original plan however my business progress is somewhat capped in my current situation and there is tremendous upside in this concept because I will be able to increase my production very significantly. I can lever up a little and pay it off very quickly and really ramp business at the same time. I have made inroads to a retail front and there is much to be gained there. When I am ready to jump ship on the property (for personal use) I can add the facility to my portfolio of investments as an income producing property while I develop something that can be a residence also (that would be a small but productive patch of soil to run 50 head or so and cope with all my other ventures).
    I better close my mouth now and get back to it but that’s my example of using leverage to move my situation forward quite significantly I believe.

  • 15 Biker // Jul 7, 2012 at 3:09 pm

    Interesting take on it all, on p.38 ‘Business’, The Weekend Australian, today “Big Properties Riding High, But Values Stagnate for Small Farm Holdings.” A claim that rural values may ‘…track sideways for the next three to five years’ might give you some breathing space, Lachlan.

    An accountant who not only talks property, but walks the talk, is an asset. Our bloke may own more rentals than we do… .
    Hope you find what you want… and can afford, Lachlan… .

  • 16 Ross T // Jul 8, 2012 at 11:00 pm

    China is the issue at the moment – so many state enterprises running at a loss (accumulating massive bad debts) just to maintain employment. Including the ones who consume our iron ore and coal!

    One wonders how they think they are going to to get our of this situation they have created for themselves – Accumulating gold seems to be one theory. Either way when they fix the problem the Australian “mining boom” is in peril.

    As for property the recent revelation of census data vs govt estimates of vacant houses being nearly 1 million more vacant houses than expected and the ABS error of 100,000 less jobs (ie no growth in 2011) is going to make things real interesting for the future of the housing market. All the migrants must be in detention centres, not in rentals – still there should be plenty of vacant houses in Canberra soon….

  • 17 Greg Atkinson // Jul 9, 2012 at 8:21 am

    Ross I don’t recall talking to anyone from China at the summit that was particularly upbeat about this year. It was more of a case of hanging on and hoping that 2013 will be better. Yet when I look at some newspaper articles back in Australia written by desk bound economists you would think all was well.

    I don’t see anything particularly boom-like in the charts above apart from perhaps gold, where the price is being driven upwards because of concerns about the global economy and not because investors feel the outlook is rosy.

    Personally I think the mining cycle has already peaked and the boom is over. It will take a while for this reality to trickle through but the stock prices of companies like BHP & Rio are already reflecting this.

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