Commodity stocks took a hit in the first quarter (Q1), as the strict lockdown in Wuhan led to heightened fears of an impending crash in demand for raw materials. Manufacturing has been hit hard over recent months, highlighting the sharp contraction in global output.
Surge pushes Baltic Dry Index to yearly high
However, the Baltic Dry Index (BDI) tells a very different story that is emerging, with a recent surge pushing the crucial barometer of global growth into a fresh 2020 high.
The BDI provides a gauge of shipping prices for Dry Bulkers, which carry unpackaged bulk cargo, such as metal ores, cement, steel, tine, coal, and grains. A rise in shipping rates are synonymous with increased demand and prices for the product it carries.
The chart below highlights the recent recovery for both the BDI and Iron Ore. There are a number of factors in play here, with coronavirus-led shutdowns for Vale in Brazil helping boost prices through lessened supply.
While coronavirus disruptions have helped drive upside for the likes of iron ore, we have seen signs that industrial production is picking up in China. The year-on-year industrial production data for China highlights the we are already 4.4% higher than the same time last year.
Looking towards the US, we also have a significant chance that Trump could push for another stimulus package in a bid to boost growth this year. Rumours of an impending $1 trillion infrastructure package should further bolster commodity prices, driving shipping prices higher yet. While this package is far from certain, it could also provide an insight into the type of stimulus countries could embark upon to boost growth during this crisis.
The beneficiaries of a commodities uplift
Should we see further upside for commodities, there are a number of potential benefactors to look out for. Focusing on iron ore, the Australian dominance in the sphere means that we see a significant relationship between the Australian dollar (AUD) and iron ore prices. The chart below highlights how a continuation of this recent trend could help bolster the AUD price going forward.
Mining rebound could be set to continue
Another way to look at things would be from a miners perspective, with the FTSE 100 hosting plenty of global mining firms. While the recovery has been mixed, owing to the different commodities in each mine, we have seen a substantial rebound over recent months, which should continue as long as the economic recovery is moving in the right direction.
From a shipping perspective, there are a number of dry bulk stocks which are hoping to rebound off the back of the recent surge in the BDI. Once again, we have a number of different types of ships in each fleet, with the breakdown providing a range of alternative outcomes from a pricing perspective.
The declines seen in the early part of the year are being reversed, and there is a strong likeliness that we will see further upside if the BDI continues the way it’s going.
Source: IG Bank