This is Part Two of a two part series. You can read Part One here
The Baltic Dry Index which tracks the costs of chartering a ship for commodities such as iron ore and coal – we wrote about this earlier in the year – has risen by over 60% according to this Financial Times article. This should come as no surprise as steel input costs have been rising rapidly. The cost of freight has also increased from $80,000 when MetalMiner first wrote about the index in late January to more than $160,000 today. So let’s tally it up. We have the current freight index (the Baltic Dry Index) rising rapidly since the end of January and a new futures index in which speculators, I mean investors can participate. Gee I wonder where the price of steel is headed. On a tangential note the article also mentions the increases are due to greater than expected stainless steel prices. That is interesting considering some of the indicators are headed in the exact opposite direction!
Again, the fundamentals tell us one story but the reality is suggesting another.
As for the third article, John Authers in an aptly titled piece called “The Observer Effect on Commodities,” suggests “one axiom that looks relevant to investment in commodities is Heisenberg’s uncertainty principle. It holds that the act of locating a particle in space makes its momentum uncertain, while an attempt to measure its momentum renders its location uncertain. It is perhaps the most famous example of the observer effect ” that by observing something, we interact with it and run the risk that we change it.” Authers then points to the ‘new money’ from fund managers chasing commodities, referencing an increase from $46b to $250b today. The article then gets into backwardation, contangos etc (which we’ll cover at some point in the future) etc but given the following two quotes from the article, “Increased demand for commodity futures has also had an effect on their supply. If prices are high now, producers are less keen to sell forward,” Mr Verleger explains. So they offer fewer futures, just as demand increases, creating an upward spiral.
It’s a very interesting article which if you have the time, I encourage you to read in full. The fear is that once the new investment dollars jump into the market, we’ll see additional metals price increases. MetalMiner will be launching a metals index of its own this summer. With the index, we hope to give metals buyers a little ammunition. If you are interested in learning more about this pricing index, drop us a line at lreisman at aptiumglobal dot com.