An excellent gauge of the strength of the world economy is the amount of iron ore being consumed. The reason is simple. Iron ore is a key ingredient in steel production. The amount of steel being produced is directly correlated to long term capital expenditures, which drives economic growth.
Tracking iron ore consumption has been a passion for several commodities traders for many years, as a sure fire tell-tale of world economic strength. It is most easily done by following a bulk goods shipping lease freight rate indicator, the Baltic Dry Index (BDI).
The main product of bulk dry good shipping is iron ore. When economies are expanding iron ore shipments will be on the increase as steel production rises. When economies are slowing down demand for steel slows and consequently demand for its main ingredient, iron ore, will slow down as well.
Traders keying off the BDI were able to exit long energy futures trades profitably at the end of 2007 and beginning of 2008, as the BDI peaked and began falling. The BDI then gave the OK signal to go long in March and April of 2008 as the BDI support levels held and began rising in the midst of the global recession.
In the past month the BDI has fallen 4,000 points. Energy traders observing this, sold out of long positions fearing growth in China was slowing dramatically. On Friday the BDI closed at 1,940. Well below its 200 day moving average of 3,125.
One factor weighing on recently depressed shipping rates is the number of new Supra Panamex ships entering the dry goods fleet. Traders, however, will be even more confident of the BDI's ability to gauge whether world economies are improving or stagnating. The added fleet supply will give resistance to the BDI's ability to rise above its 200 day moving average. Should it climb back above 3,125, be careful not to be sitting on short strategy crude, heating oil or gas futures.
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