The Surprising Relevance of the Baltic Dry Index

It is possible to trade the Baltic Dry Index using forward freight agreements, which cover various shipping routes. The Baltic exchange publishes a variety of spot freight rates, which are the basis for settling bitmex review these contracts monthly. It is impossible to trade the Baltic Dry Index directly because it is not an investible index. Dry bulk ships account for about 22% of the global merchant fleet (Chart 1).

The main driver of this surge was linked to commodity prices, particularly oil. The index then plummeted to historical levels and remained weak despite a recovery in global trade. A factor is that many ships were ordered during the “bubble years” and have entered the market, providing capacity growth above demand growth. In recent years the BDI has remained low, underlining a situation of excess capacity in the shipping industry. 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.

Members contact dry bulk shippers worldwide to gather their prices and they then calculate an average. Coal, along with iron ore, is one of the most traded dry bulk commodities by volume in the world. Countries most involved in the importation of coal for their primary energy and electricity needs are India, China, and Japan. Grain is another major cargo in terms of seaborne dry bulk trade and accounts for a chunk of the total dry bulk trade worldwide. The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe.

What is dry shipping?

The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate. Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand.

This was the outcome of declining shipping capacity, pushing shipping rates higher. 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 tickmill review of the current freight cost on various routes by a a panel of international shipbrokers.End of month values.Data from September 2019 to July 2022 taken from Bloomberg. First, the growth in global demand over time for fossil fuels has been more steady than for various dry bulk commodities.

Between 2010 and 2013, China doubled its shipyard capacity, producing so many boats that the world’s fleet of cargo vessels doubled in number. The chain of uncertainty so puzzled B.D.I. followers that their confidence in the index’s predictive abilities waned. Typically, demand for commodities and raw goods increases when global economies are growing.

But other causes point to gloomier trends that are also having a large impact, such as China’s declining industrial base and continuing tepid growth in many European countries, which eats into imports. For decades, trade has reliably increased faster than gross domestic product, often by two or more times. In 2015, global imports rose only 1.7 per cent, compared with three per cent the year before. Meanwhile, during that time, global G.D.P. growth was about 2.7 per cent. Until recently, only a few economists—Bhanu Baweja, an emerging-markets specialist at U.B.S., prominently among them—had taken note of this trend.

What Is the Baltic Dry Index (BDI)?

The decision to not include Handysize contributions makes no statistical difference to the calculation of the BDI, based on the above weightings. Dry shipping is the transportation of dry cargo by ship in an enclosed container. Dry cargo includes commodities such as metal ores, coal and grains but excludes oil, gas, chemicals, etc. Dry bulk cargo does not include tankers that ship oil, refined products, or chemicals; container ships; or roll-on ships, which carry vehicles that can be driven or rolled on board.

It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn’t actually going to use it.

1. 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.
2. Chart 3b shows the period that the Capesize has been published and rebased to match the BDI at inception to better illustrate relative volatility.
3. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand.

By the turn of the nineteenth century, however, it had become a dependable, highly policed hub for settling cargo-ship rates and regulating freighter transactions, where deals could be closed with a handshake. In the early nineteen-hundreds, the exchange, by then known as is fxcm legit the Baltic Exchange, moved into a more ornate and grim location on St. Mary Axe. The exchange was among the first of the City of London’s so-called coffeehouses, a string of early-eighteenth-century meeting halls where like-minded people ate, drank, and conducted business.

We and our partners process data to provide:

And they account for 30% of the total value of $14 trillion of cargo shipped annually. The Baltic Dry Index (BDI) is one of those more obscure financial indicators that turn up in the financial press when freight shipping rates break out of comfortable well-established ranges. Unfortunately, there is often little accompanying analysis to help investors decode what is driving these changes and how to capitalize on them. This article aims to help investors understand the BDI, think through what changes in it might mean, and learn how to take advantage of them. Stock prices increase when the global market is healthy and growing, and they tend to decrease when it’s stalled or dropping. The index is reasonably consistent because it depends on black-and-white factors of supply and demand without much in the way of influences such as unemployment and inflation.

The Baltic Dry Index (BDI) is a practical economic indicator on a global scale. The B.D.I. justified economists’ belief in its predictive power almost immediately after its launch. In August, 1986, the index hit bottom unexpectedly, the result of a sharp slowdown in imports to the U.S.; worsening U.S. trade went on to be partly responsible for the stock-market crash of October, 1987, and the global recession that followed. 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 shipping quotes are combined into the overall index with a 40% weighting for Capesize, and 30% each for Panamex and Supramax.

The BDI is a summary indication of the cost to ship bulk cargo over 20 standard ocean routes (the Appendix has a list of routes).[1] In other words, it indicates dry bulk shipping rates. The Baltic Exchange compiles the daily hire rate in USD from international shipbrokers for three types of bulk freight ships. Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). A change in the Baltic Dry Index can give investors insight into global supply and demand trends. Many consider a rising or contracting index to be a leading indicator of future economic growth.

The Surprising Relevance of the Baltic Dry Index

It measures changes in the cost of transporting various raw materials, such as coal and steel. It is a composite shipping and trade index issued daily by the London-based Baltic Exchange. The BDI is a measure of the cost of transporting raw materials worldwide. The index can fall when the goods shipped are raw, pre-production material, which is typically an area with minimal levels of speculation. The index can experience high levels of volatility if global demand increases or suddenly drops off because the supply of large carriers tends to be small with long lead times and high production costs. This was higher than in the same month the previous year, and higher than in May 2020, immediately after the outbreak of COVID-19, when the index stood at 504.

These weights are based on the volume of cargo (in dwt) shipped on each type. The Baltic Exchange publishes several other lesser-known freight indices, including two tanker indices and, more recently, a containership index. The containership index is not available on Bloomberg, but the tanker indices have been published since 1997 (Chart 5).