Commodity Watch: A Baltic Freeze

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" data-fr-image-pasted="true" src="/getContentAsset/e4db1c4c-2687-44cd-adbd-db1eb849e5d2/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.jpg?language=en" alt="Ahmad Al Sati" title="Ahmad Al Sati" class="fr-fic fr-dii" style="width: 180px"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>The Baltic Exchange Dry Index (BDI) tracks the cost of transporting raw materials by sea and traces its origins to the London Virginia Coffee House (established in 1744) where merchants used to meet and trade goods and information from America. Renamed the Baltic Coffee House in the 1800s as the Baltic tallow trade increased, it became a hub of maritime information and trade for global commodities. In 1985, the house introduced the Baltic Freight Index, which tracked dry cargo rates across a list of routes. &nbsp;BFI later morphed into BDI, which is the standard for tracking shipping rates today.</p><p><br></p><p>Shipping covers 80% of global trade by volume and maritime freight prices remain both an economic and trade flow indicator. Prices are generally a function of demand and disruption. Demand for freight bookings into the US is up by as much 275% in May (per some estimates) after dipping in April. Surge pricing might be next. According to the WSJ, rates from China to the US West Coast are already up by 8% since the trade détente and could increase by 50%. Although freight prices are generally down from their peak in '24, they remain elevated relative to ‘23 (74% higher for some routes). Usually, prices increase in the summer, but peak season might be early in '25 potentially increasing prices further.</p><p>&nbsp;</p><p>Why does it matter?</p><p>Freight costs are inflationary. Although quantitatively similar to price shocks in food and oil prices, freight’s impact is much slower and stickier according to an IMF study that examined 143 countries over 30 years. Inflation from freight price increases tend to occur ~12 months after the initial hike and lasts for ~18 months. According to the IMF shipping costs added 1.5% to inflation in ‘22. Lower demand and slower economic activity may counter higher prices but if their effects track the IMF’s findings, increase in prices may last well into '26.</p><p><br></p><p>Higher freight prices negatively impact supply chains. They impede consistent uninterrupted trade as businesses manage costs by lowering shipping frequency. Lower margins mean less investment in production lowering efficiency and economies of scale. Fluctuating costs also make it more difficult for businesses to budget and plan. Overall, higher shipping prices mean uncertainty, slower delivery times and lower trade volumes.</p><p><br></p><p>Trade finance can help manage supply chain bottlenecks (if not inflation). It can support businesses as they navigate increased costs, explore and expand into new markets and invest in their supply chains. Given the global structural undersupply of trade finance and the new uncertain environment, the risk premia will be higher. But, in times of limited capital and increasing uncertainty, the need for funding may outweigh concerns about cost. For investors, short duration secured credit could be an optimal way to invest in trade disruption. Well capitalized lenders with a global footprint plus the requisite infrastructure and credit know-how should be the primary beneficiaries of this increased demand for capital.</p>