Hint of growth in demand for raw materialsBy Esther Bintliff...

Hint of growth in demand for raw materials
By Esther Bintliff

Published: January 28 2009 02:00 | Last updated: January 28 2009 02:00

The cost of shipping dry bulk commodities such as iron ore, coal and grains yesterday rose to its highest level in three months, recovering 51 per cent from its December low, on signs of a tentative renewal in demand for raw materials.

The Baltic Dry Index, the market benchmark often seen as a leading indicator of commodities demand and global economic activity, climbed above 1,000 points for the first time since October, reaching 1,004 points in its sixth consecutive session of gains.

The Baltic Dry has now risen by 51.4 per cent since hitting a 22-year low of 663 points in December, when the onset of recession across developed and many developing economies savaged demand for commodities. But the index remains well below last May's record high of 11,793 points.

Analysts said the rally in shipping costs could be an early sign that global trade was beginning to revive from the paralysis that took hold late last year, which led to many ships lying empty.

Peter Norfolk, director of research at Simpson, Spence and Young shipbrokers, said the improvement in the market had been driven by a surge in chartering of the world's biggest ships, known as capesize vessels, which are used to move iron ore. The bulk of demand has come from Chinese steel mills and iron ore traders.

"Steel and iron ore prices seem to have stabilised a little, especially in China," said Mr Norfolk.

"We've been through a period of significant destocking and the Chinese steel mills have been encouraged by the fact that prices seem to have hit a floor, so they're finally coming back in to buy up some raw materials."

However, Mr Norfolk said: "The fundamentals are still gloomy and in order for the rally to be sustained. even just in the near-term, we'll need more activity, particularly from the Far East charterers."

The Baltic's rise was a rare bright spot in commodity markets, with most other products weakening as traders booked profits.

Base metals fell sharply across the board as further builds in inventories at London Metal Exchange warehouses deepened the gloom surrounding the sector.

Copper plunged 5.6 per cent to $3,315 a tonne. It was in retreat after touching an eight-week high of $3,603.75 yesterday, lifted by short-covering in a thinly traded market because of the Chinese new year. Copper inventories rose by 12,375 tonnes yesterday to a five-year high of 451,800 tonnes, according to LME data.

Robin Bhar, senior metals analyst at Calyon, said: "The scale of demand destruction and destocking is such that inventories will continue to rise unless they are matched by production cuts."

Aluminium sank 2.7 per cent to $1,341 a tonne, tin was 6.1 per cent lower at $11,550 and nickel fell 4.8 per cent to $11,201 a tonne.

Oil prices also fell, reversing early gains, with ICE March Brent losing $3.23 to close at $43.73 a barrel, having touched an intraday high of $48.40.

Nymex March West Texas Intermediate dropped $4.15 to settle at $41.58 a barrel.

US crude prices were choppy in after-hours trade as the American Petroleum Institute released its petroleum inventory data for the week ending January 23. US crude stocks rose 800,000 barrels for a fifth successive week of gains.

Gold hovered around $900 a troy ounce.