The Surprising Relevance of the Baltic Dry Index

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The Surprising Relevance of the Baltic Dry Index

On April 5, 2021, Posted by , in Forex Trading, With No Comments

The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component vessels. Analyzing multiple geographic shipping paths for each index gives depth to the index’s composite measurement. Members contact dry bulk shippers worldwide to gather their prices and they then calculate an average.

In January, 1999, and again in April of that year, the B.D.I. revisited record-low territory, heralding a depressed global investment environment and shortfalls in consumer spending, factors that would soon help puncture the dot-com bubble. The most direct instrument is forward freight agreements, which cover various shipping routes. The BDI predicted the 2008 recession in some measure when prices experienced a sharp drop. In one striking example of the insight that can come from the index, analysts could observe that between September 2019 and January 2020, the Baltic Dry Index (BDI) fell by more than 70%, a strong indication of economic contraction.

  1. There have been brief periods when the Capesize index dropped below zero, implying that shippers were losing money to keep their ships busy.
  2. Dry bulk ships account for about 22% of the global merchant fleet (Chart 1).
  3. Analyzing multiple geographic shipping paths for each index gives depth to the index’s composite measurement.
  4. The dip in the B.D.I. presaged IndyMac’s bankruptcy, the first major bank failure of the global financial recession.

The Baltic Dry Index is a composite index created by the London-based Baltic Exchange that assesses the cost of transacting dry bulk cargo around the world. It offers insight into global economic activity and trade flow dynamics as it provides an indication of demand for ships to transport goods across oceans and therefore, demand for these goods themselves. The Baltic Dry Index (BDI), is issued daily by the London-based Baltic Exchange. It is considered a proxy for dry bulk shipping stocks as well as an indicator for the general shipping market. It based on a daily assessment of the current freight cost on various routes by a a panel of international shipbrokers. Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers.

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But if sober-minded, mainstream economists were tempted to dismiss this ostensible trade calamity outright, they found that they couldn’t. Based in London, this gauge reflects the rates that freight carriers charge to haul basic, solid raw materials, such as iron ore, coal, cement, and grain. As a daily composite of the tonnage fees on popular seagoing routes, the B.D.I. essentially mirrors supply and demand at the most elementary level. A decrease usually means that shipping prices and commodities sales are dropping (the latter because shippers are competing over fewer consignments). Shipping is a direct indicator of whether people want goods, and softness in shipping prices is therefore a sign of weakness in manufacturing and construction.

For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing. Soon after, though, the Baltic Dry Index began to lose its lustre as a predictive tool. The primary reason was a shipbuilding spree in China, intended to support the country’s position as the world’s largest consumer of commodities, most of which were needed to feed uncontrolled construction and industrial expansion.

As global commerce grew with the emerging industrial revolution in the 19th century, the Baltic became a more formal organization. It started compiling pricing information on various commodities and disseminating them in an early version of indices. By the second half of the 19th century, it was becoming more international, and its scope expanded to include agricultural commodities. It is a composite shipping and trade index issued daily by the London-based Baltic Exchange. The index can fall when the goods shipped are raw, pre-production material, which is typically an area with minimal levels of speculation.

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This analysis was based on the fleet composition, vessel utilisation including ballasting and total cargo moved – based on import/export reports and AIS data, the BDI weightings will be reviewed on an annual basis. The decision to not include Handysize contributions makes no statistical difference to the calculation of the BDI, based on the above weightings. Average daily earnings for capesize vessels, which typically transport 150,000-ton cargoes such as iron ore and coal, decreased by $1,207 to $15,130. Among them is a growing economic malaise in developing countries, which is stalling poverty reduction and hurting attempts to expand the middle class. Such sluggishness is also crimping multinational earnings, evident not only in corporations’ quarterly results but also in the recent softness in the U.S. job market. And economically advanced countries like Germany and Japan have seen their industrial production decline as a result of trade shortfalls.

Baltic Dry Index from January 2018 to September 2023

Other types include cement, forest products, some steel products, copper, and other base metals such as lead and nickel. The Baltic Capesize Index tracks the cost of transporting various raw materials, such as coal and iron ore on vessels measuring over 100,000 deadweight tonnage in size. This index focuses on long-distance voyages between major Industrialized countries such as China, Japan, and South Korea. The movements of the The Baltic Dry Index can have important implications for financial markets worldwide, because they reveal information about global supply and demand levels, which then affects commodity prices.

In 2009, the index has slowly picked up suggesting demand for raw materials is being revived. The BDI itself is not a security that traders can buy or sell on the market, but it is a bellwether for what traders forex returns can expect from shipping stocks. The Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases.

A Panamax ship is a vessel that is designed to travel through the Panama Canal. Various futures exchanges also offer freight futures contracts, including the European Energy Exchange and the Singapore Exchange. Over the years, the Baltic Exchange started publishing subindices for each of the BDI vessel types (Charts 3a,b). The Panamex Index debuted in early 2000, followed by Capesize in 2014 and Supramax/Handymax in 2017. Bulk cargo is distinct from general cargo, which refers to cargo shipped in some packaged form, whether in sacks or palettes or some other organized or grouped manner.

Understanding the Baltic Dry Index

While the initial effect of the pandemic was a decline in shipping rates because of a drop in demand, by the second half of 2021, the BDI surged. This was the outcome of declining shipping capacity, pushing shipping rates higher. Today the Baltic Exchange is a key player in the global freight shipping market, compiling and disseminating information about the industry and freight derivatives.

There are also various sub-classes of ships within these broad categories designed to be compatible with the Suez Canal and various ports worldwide. The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from some financial information and news services such as Bloomberg and Reuters. The BDI is the successor to the Baltic Freight Index (BFI) and came into operation on 1 November 1999. The BDI continues the established time series of the BFI, however, the voyages and vessels covered by the index have changed over time so caution should be exercised in assuming long term constancy of the data.

More generally, investors can monitor the BDI for a leading indicator of whether a recession or economic boom is coming, although these signals can be obscured by shipping technicals. If “Baltic Dry Index” sounds a bit like something from a bygone era, you wouldn’t be too far off. It dates to 1744, when businessmen and shippers involved in trade and shipping in the Baltic Sea area started meeting regularly at the Virginia and Baltick Coffeehouse in London to exchange news, trade securities, and do shipping deals.

Likewise, when commodity demand softens, people do not need the volume that Capesize offers. There have been brief periods when the Capesize index dropped below zero, implying that shippers were losing money to keep their ships busy. The BDI jumped six-fold last year as the global economy recovered from the Covid slowdown, spurring a sudden demand for raw materials. Meanwhile, congested ports meant that bulk carriers had to wait weeks or more to load and unload cargo, effectively curtailing the supply of available ships. The BDI is a fundamental leading indicator of global economic activity and a technical indicator of freight industry capacity.

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