Baltic Dry Index
The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index tracks worldwide international shipping prices of various dry bulk cargoes.
The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."[1]
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[edit] Historical origin
The Baltic Exchange traces its roots to the Virginia and Baltic Coffeehouse in London's financial district in 1744. [2]
[edit] How it works
Every working day, a panel of international shipbrokers submits their view of current freight cost on various routes to the Baltic Exchange. The routes are meant to be representative, i.e. large enough in volume to matter for the overall market.
These rate assessments are then weighted together to create both the overall BDI and the sizespecific Supramax, Panamax, and Capesize indices. The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:[3]
| Ship Classification | Dead Weight Tons | % of World Fleet | % of Dry Bulk Traffic [4] |
|---|---|---|---|
| Capesize | 100,000+ | 10% | 62% |
| Panamax | 60,000-80,000 | 19% | 20% |
| Supramax | 45,000-59,000 | 37% | 18% w/ Handysize |
| Handysize | 15,000-35,000 | 34% | 18% w/ Supramax[5] |
The BDI contains route assessments both on the basis of "USD paid per ton carried" (i.e. before fuel, port and other voyage dependent costs are deducted) and "USD paid per day" (i.e. after voyage dependent costs are deducted, often called "Time charter equivalent earnings"). Fuel (="Bunkers") is the largest voyage dependent cost and moves with the crude oil price. In periods where bunker costs fluctuate significantly, there BDI will therefore move more than the shipowners' realised earnings.
The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from major financial information and news services such as Thomson Reuters and Bloomberg L.P..
[edit] Why economists and stock market investors read it
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).
The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in deserts. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates..."[6] The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.
Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.[7]
Because it provides "an assessment of the price of moving the major raw materials by sea," according to The Baltic, "... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade—devoid of political and other agenda concerns."[2]
Another index, the HARPEX, focuses on containers freight. It provides an insight on the transport of a much wider base of commercial goods than commodities alone.
Other leading economic indicators—which serve as the foundation of important political and economic decisions—are often measured to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. "People don't book freighters unless they have cargo to move."[2]
[edit] Significant levels
On May 20, 2008, the index reached its record high level since its introduction in 1985, reaching 11,793 points. Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986;[8] though by 4 February 2009 it had recovered a little lost ground, back to 1,316.[9] These low rates moved dangerously close to the combined operating costs of vessels, fuel, and crews.[10][11]
By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the reduction of letters of credit, historically required to load cargoes for departure at ports. Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards.[12][13] This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.
During 2009, the index recovered as high as 4661, but then bottomed out at 1043 in February, 2011, after continued deliveries of new ships and flooding in Australia.[14]
Though rebounding to 2000 on October 7,[15] by February 3, 2012, the index made a new multi-decade low of 647 on a continued glut of container ships and decreases in orders of iron and coal.[16]
[edit] References
- ^ Baltic Exchange
- ^ a b c Why you should care about The Baltic Dry Index
- ^ Data from Wikinvest, "Composition of the Baltic Dry Index"
- ^ This is measured in terms of the tonnage of cargo carried multiplied by the distance traveled
- ^ Lamb, Thomas. Ship Design and Construction. Jersey City: Society of Naval Architects and Marine Engineers. ISBN 0-939773-40-6 and CIA World Factbook 2005. Data slightly dated as there has been increased construction in the Capemax size the past three years
- ^ http://www.economist.com/business/displayStory.cfm?story_id=12414753&source=features_box1&mode=comment&intent=readBottom
- ^ Commodity indicators Show Strain On Bull (market)
- ^ Collapse in dry bulk shipping rates unprecedented in its severity
- ^ Commodity Shipping Index Advances the Most Since at Least 1985
- ^ Marine Shippers Scuttled As Baltic Measure Hits Low
- ^ Baltic Dry Index Drops Below 1,000 for First Time in Six Years
- ^ Asian shipyards face prospect of bankruptcy
- ^ Shipper Industrial Carriers Files for Bankruptcy
- ^ Bloomberg Dry-Bulk Shipping Extends 2011 Drop to 20% on Australia Floods
- ^ Baltic Dry Index Is At 2000 - But Nobody Is Watching
- ^ Dry Bulk Freight Index Drops and Container Shipping Line Forecasts and Profits Slump
[edit] External links
- Baltic Exchange Daily Indices
- DryShips Inc. daily market report
- The best economic indicator you've never heard of - Article at Slate.com
- stockcharts.com BDI chart
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