While demand for imported grains or oilseeds is much more diversified, incremental demand is largely driven by global economic growth—emerging and developing countries in particular. Since China is the largest importer for iron ore and coal, its economic activity has considerable implications for dry bulk shippers. This means investors must know how to assess economic conditions rather than just relying on news, television, and experts that only show half the story to understand how the global economy is really doing.
Iron ore and coal
Demand for any commodity is subject to population growth and economic expansion. Commodities like iron ore and coal are largely used in manufacturing steel and generating electricity. As mentioned in previous articles, iron ore is a key feedstock for making iron and steel, while coal (which can be separated into thermal and coking coal) is used for electricity and industrial purposes. Intuitively, growth in electricity consumption (coal in particular) and steel production are two basic indicators investors must assess.
While less sensitive, food consumption remains closely tied to developing economies’ economic growth. As the economy grows, people will take home more income, and part of that will go into eating more and better. So to get a grasp of how much more food people in developing countries will consume, you could could figure out how fast economic activity and wages are growing.
There are several indicators investors should follow if they want to know where an overall economy is heading. These include the manufacturing PMI (purchasing managers’ index) of specific countries, GDP (gross domestic production), credit, inflation rate, disposable income, industrial and electricity output, interest rate, and leading indicators. All of these indicators reflect different aspects of the economy—some are leading, some are coincident, and others are lagging.
Most of these indicators are published monthly. While these indicators highly correlate with each other, they’re subject to divergences and short-term statistical noise. So the best approach to get a fuller picture of an overall economy is to look at these indicators as a whole, rather than just one or a few.
© 2013 Market Realist, Inc.
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