By Drew Hasselback -- The two crucial indicators you’ve never heard of

What you should take from the rise of the Baltic Dry Index

There’s still a fair bit of gloomy economic data lurking around out there, but there are also at least three numbers that should give most miners reason to smile this summer.

We’ll get into specifics in a bit, but here’s the takeaway. We’ve seen the copper price rise about 50 per cent since the beginning of the year. We’ve also seen a key commercial interest rate drop to a record low, making it easier for businesses to buy those metals. And we’ve seen a dramatic rise in the index that tracks bulk shipping rates, something that only happens if people are buying lots of commodities.

Let’s start with that shipping data, which is tracked by something called the Baltic Dry Index. I’ve seen the Baltic Dry described as the “most important economic indicator you’ve never of.” The relative obscurity of the Baltic Dry or “BDI” renders it especially appealing to mining and commodities geeks like me. There’s a certain appeal to being able to mention the Baltic Dry in causal conversation.

The bizarre name of the index suggests it deals with a specific geographic area, but that’s not the case. The Baltic Exchange in London, England, collects the rates charged by shippers to transport huge shiploads of raw materials along international trade routes; like the cost of shipping 150,000 tonnes of iron ore from Australia to China on a “capesize” vessel.

The Baltic Dry was sitting at 2,700 points by mid-year, up from less than 1,000 at the beginning of the year. There’s been a dramatic shift in demand for shipping. Last November, 20 per cent of the world’s big ships were sitting idle due to reduced demand for iron ore. By May, some customers were being asked to wait until July before they could load their cargoes. As shipping moves into short supply, transportation prices spike. Economists track the Baltic Dry as a “leading indicator.” Because the index follows the price of shipping raw materials, it reveals when businesses are stocking in order to ramp up production. A rise in the price therefore points to economic growth. Indeed, China is the world’s biggest commodities buyer, and government officials there have been talking about an uptick of activity in the country’s economy. The spike in demand for shipping capacity, particularly on Pacific routes, offers third-party evidence that Asian manufacturers have a growing appetite for raw materials. That’s always good news for Canadian miners.

Libor is another number cherished by those, like me, who probably could use a few more hobbies. The word is an acronym for London Interbank Offered Rate, which should be enough of a mouthful for one to readily understand why most people just call it Libor. To put it simply, Libor is the global price of money.

Most commercial lenders price their loans in terms of the Libor plus a certain number of percentage points. The Libor rate affects $350-trillion worth of financial contracts worldwide. A rise in the rate last fall helped aggravate the market crash. Borrowing became expensive, as nervous bankers grew wary about lending each other money. This made credit scarce and expensive.

Things have eased substantially in recent months. By early May, Libor had fallen to less than one per cent, the lowest rate on record. Money is cheap. Credit terms are easing, and this makes it easier for businesses to finance the purchase of boatloads worth of metals. This is more good news for miners.

Then there’s the granddaddy of basic mining stats, the copper price. This number has less immediate impact on the North, where the base metals business isn’t as important as in Ontario or Quebec. But the number is indirectly important in that a healthy base metals business generally will trigger broader interest in exploration.

We definitely need a push in that direction. Stats for Canadian exploration are weak. A recent survey by Natural Resources Canada suggests nationwide exploration spending should fall to about $1.5-billion this year, down from $2.8-billion in 2008. None of this should surprise anyone who follows the junior sector. The drop in metals prices last year wiped out interest in backing high-risk exploration ventures.

By mid-year, copper had moved back to $2 (U.S.) a pound from less than $1.50 (U.S.) last December. There’s some question whether the price will hold at or above that level. If it does, it suggests an economic rebound is on the way. Copper is a “leading indicator” because it’s a key ingredient in so many different applications. A healthy copper market should trigger interest in other metals and their exploration plays.

The recession hasn’t been pretty, but it definitely wasn’t going to last forever. The surge in the Baltic Dry Index, the fall of the Libor, and the growth in the copper price show that business is starting to budge in other parts of the world.