Often shortened to the BDI, the Baltic Dry Index is a composite of the Capesize, Panamax and Supramax Timecharter Averages. The BDI index measures the cost of transporting raw materials like coal and steel around the world, or more specifically, the demand for shipping capacity against the supply of dry bulk carriers. You should interpret the Baltic Dry Index as a reliable indicator of average shipping costs of dry bulk cargo over 20 standard ocean routes. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. It takes an assessment of nearly two dozen major shipping routes to gauge the rate of ships carrying dry commodity goods like coal, iron ore, and grain. When shipping rates are down due to slowing demand for commodities, it pulls the index lower.
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.
For example, when times are good, shippers are flush with cash that is, more often than not, spent on new ships. 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.
Why Do Central Banks Care About Wage Growth?
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. Rather it is, by construction, an index of average dry bulk shipping quotes over some 20 ocean routes obtained from a global network of shipping agents and brokers. If “Baltic Dry Index” sounds a bit like something from a bygone era, you wouldn’t be too far off. As global commerce grew with the emerging industrial revolution in the 19th century, the Baltic became a more formal organization.
- The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component vessels.
- When shipping rates are down due to slowing demand for commodities, it pulls the index lower.
- Investors and the financial press pay far more attention to the BDI than to other freight indices.
- Nobody is going to pay to book a Capemax cargo ship who isn’t actually going to use it.
- Coal, along with iron ore, is one of the most traded dry bulk commodities by volume in the world.
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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. By using this site or/and our services, you consent to the Processing of your Personal Data as described in our Privacy Policy. If you don’t agree with our Privacy Policy then you shouldn’t use our services.
As such, the index is said to forecast economic storms that are brewing out at sea. However, like most weather forecasts, it’s not always accurate as a range of factors can cause the index to forecast sunny economic times when a storm is actually about to make landfall. Today the Baltic Exchange is a key player in the global freight shipping market, compiling https://www.dowjonesanalysis.com/ and disseminating information about the industry and freight derivatives. In addition to dry bulk cargo, the Baltic Exchange is also active in a wide range of other types of cargo, including tankers, container ships, and even air freight. Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers.
→ How to trade the Baltic Dry Index?
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. Panamax ships have a 60,000 to 80,000 DWT capacity, and they’re used mostly to transport coal, grains, and minor bulk products such as sugar and cement. Panamax cargo ships require specialized equipment for loading and unloading.
Various futures exchanges also offer freight futures contracts, including the European Energy Exchange and the Singapore Exchange. It is a large bulk carrier that usually has five cargo holds and deck cranes. A Panamax ship is a vessel that is designed to travel through the Panama Canal. Over the years, https://www.topforexnews.org/ 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. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Tankers can be loaded or unloaded within a day or so and prepared for a new voyage within days. Dry bulk ships require a week or more to load or unload cargo, and it can take weeks to clean and prepare a ship for new cargo. 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.
What Is the Baltic Dry Index?
Today, the Index is based on a daily panel of shipbrokers that submit their view of the current freight cost for various routes to the Baltic Exchange. The routes are representative, cover four different sizes of dry bulk ships, and are weighted together. The result is an assessment measuring the demand for shipping capacity against the supply of ships. Because it measures shipping capacity demand, it is considered a leading economic indicator because demand for capacity increases as the global economy expands and contracts along with a recession. Baltic Dry Index is a shipping and trade index issued daily by the London-based Baltic Exchange.
Intuitively, you might expect a close relationship between commodity prices and the BDI. After all, when demand for some raw materials rises, there will usually be a higher demand for shipping bulk commodities. There is academic work that suggests that commodity prices do help drive the BDI, at least in https://www.forexbox.info/ the short run. Dry bulk cargo is commodities that are shipped in loose unpackaged form. The primary bulk commodities are iron ore, coal, grains, bauxite/alumina, and phosphate rock. Other types include cement, forest products, some steel products, copper, and other base metals such as lead and nickel.
How the Baltic Dry Index Works
The routes are meant to be representative, i.e. large enough in volume to matter for the overall market. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation.
→ What is a Capsize vessel?
While it shouldn’t be the only sign investors look for, it can be combined with other indicators to signal that the worst is finally over. First, the growth in global demand over time for fossil fuels has been more steady than for various dry bulk commodities. Second, OPEC (for the most part) has worked to keep oil supply growth roughly in line with growth in demand. This allows refiners and shippers to increase the supply of dirty and clean tankers as volumes grow. Third, tankers have some ability to switch from dirty to clean cargos and vice versa, as supply/demand dynamics shift within the dirty and clean sectors.
