Strategic Business and Market Trends with RD Watkins
In Part 1 we presented the Baltic Dry Index; what it is and how it tracks the beginning of the supply chain. Now we continue our research into the benefits to tracking the trend of general business sentiment using the BDI as an input to strategy planning.
If one recollects the production pipeline, the shipping of raw materials is second in the flow after the raw materials have been purchased. The BDI depicts these shipping trends. Because of the globalization of economies, the costs of harvesting raw materials are very likely to be less expensive in a location outside the country of production. Much of the iron ore mined in Brazil is shipped to China for conversion to end products needed to fuel their growth such as re-bar and sheets of steel used in car production. Increases in shipping costs are inherently added into the final cost of those products.
So, when observing the BDI chart one can see that if the price per bushel of wheat is going up and the BDI is going up, then the price of foods predicated on sea-bond shipment will go up as well. This is not a directly trade-able indicator but, does augment the inputs available to judge the trending of the business climate and price or margin pressures into the future. For an entrepreneur whose start-up strategy is predicated an the opportunity remaining some time into the future, this indicator can support confirmation of the likely-hood of that scenario.
Using a high rise apartment builder, lets assume that a large project Request for Proposal is on the developer's desk. He knows his direct suppliers can deliver his cement and steel at $X and $Y/ton respectively, based on general market pricing. He can now look at his suppliers supply chain and see if shipping cost are rising, i.e. soon to be a factor in his rising costs which might be passed on to him. The developer would then negotiate a longer term fixed cost contract committing the supplier to a price beyond the 6 month window that the BDI portends. He would be less likely to go with the vendor who wants a cost+ based on changing market conditions. This latter situation would ensure that the vendor makes the same and that the developer has less precision and confidence in his proposal pricing to his customer.
Commodity Demand Trends
As an indirect indicator of demand for dry shipped commodities, the BDI can be used by strategist to set assumptions regarding materials required by the business. For instance a road builder would monitor increases and decreases in the volume trends of cement and iron ore purchased as COMEX futures contracts. With these inputs he would then analyze to confirm trend agreement between the Comex futures and the BDI shipping costs. His cost trend projections serve to ensure appropriate buffer and contingency plans for likely impacts. On projects of duration greater than 6 months, raw materials and shipping of the same can have a significant impact and keep the the builder on budget and a customer happy.
- In part 3 our discussion turns toward how your competitors general planning for capital deployment is exposed and how to remove fiat currency distortion from the BDI indicator for a more normalized, tangible asset based reading.
RD Watkins brings value and builds productive and collaborative relationships by "Applying Common Sense Project Management Principles in a Virtual World". He fills the role of Senior Project Manager, is a PMI certified PMP® (Project Management Professional) and holds CompTIA IT Project+™ credentials. You can connect with RD to discuss his capabilities in cost effectively managing and enhancing productive consensus on your virtual projects through his LinkedIn.com profile at http://linkedin.com/in/rdwatkins or contact him via email at mailto:mailto:rd@rdwatkins.com.
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