What Is the Baltic Dry Index? The Motley Fool

what is baltic dry index

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. It is called a Capesize vessel because it is too large to travel through the Panama and Suez canals and so must traverse the Capes of Good Hope and Horn. 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.

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. 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 BDI is a fundamental leading indicator of global economic activity and a technical indicator of freight industry capacity. For much of its history, the BDI has traded https://www.topforexnews.org/ in a range between 1000 and 2000 (see the Baltic Dry Index chart below, Chart 2). It typically falls as recessions approach and leads the recovery out of recession.

Type of Dry Bulk Commodities

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 these contracts monthly. It is impossible to trade the Baltic Dry Index directly because it is not an investible index. The most direct instrument is forward freight agreements, which cover various shipping routes.

what is baltic dry index

Investors are always looking for practical economic indicators they can use to help them make informed investing decisions. The Baltic Dry Index (BDI) is a practical economic indicator on a global scale. https://www.forexbox.info/ The BDI predicted the 2008 recession in some measure when prices experienced a sharp drop. Then, into 2021, the BDI rose dramatically as the pandemic led to snarls and delays in global shipping.

How the Baltic Dry Index Works

During more extended slowdowns, shipowners may remove ships from service or scrap older and more inefficient ships. Dry bulk ships account for about 22% of the global merchant fleet (Chart 1). And they account for 30% of the total value of $14 trillion of cargo shipped annually. Stock prices increase when the global market is healthy and growing, and they tend to decrease when it’s stalled or dropping.

  1. Intuitively, you might expect a close relationship between commodity prices and the BDI.
  2. Another strategy is going long or short oil depending on whether the price of oil is rising or falling; the idea is a rising BDI implies more shipping and higher demand for fuel.
  3. Alternatively, investors can invest in the BDI more indirectly through shipping company equities.[3] We caution that shipping profitability depends not only on the level and trend of the BDI but on what is driving it.
  4. It is a large bulk carrier that usually has five cargo holds and deck cranes.
  5. The Baltic Exchange has separate indices for tankers and container ships.

That occurred even more recently as the index touched a historic low of 509 this February. It’s a low that wasn’t fueled entirely by weak economic activity, although slowing growth in https://www.dowjonesanalysis.com/ China certainly didn’t help matters. Chart 3b shows the period that the Capesize has been published and rebased to match the BDI at inception to better illustrate relative volatility.

This article is aimed at investors for whom the BDI is mostly off their radar screen and then are left wondering what to make of it when it pops up in the financial press headlines. Investors can use the BDI to help trade or invest in related financial instruments.

The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand). Why we should care about the Baltic Dry Index Despite its shortcomings, the Baltic Dry Index is still a useful measure. For example, while it was slow to signal troubling times in 2008, its rise in 2009 did suggest that demand for commodities was increasing, thus hinting that the worst was over for the financial crisis. As such, the index can be a useful tool for investors — it can provide an early sign that the global economy is improving after being battered during a global recession. This is because the index should increase as demand for shipping capacity rises, which should happen as an economy begins to heal from a downturn.

Baltic Dry Index

The containership index is not available on Bloomberg, but the tanker indices have been published since 1997 (Chart 5). The shipping quotes are combined into the overall index with a 40% weighting for Capesize, and 30% each for Panamex and Supramax. These weights are based on the volume of cargo (in dwt) shipped on each type. Every working day, a panel of international shipbrokers submits their assessment of the current freight cost on various routes to the Baltic Exchange.

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Capesize boats are the largest ships in the BDI with 100,000 deadweight tonnage (DWT) or greater. Its history and inner workingsThe Baltic Dry Index traces its roots back a couple hundred years to when merchants gathered in London establishments to regulate trade and formalize the exchange of securities. However, the current index dates back to 1985, when the first daily freight index was published by the Baltic Exchange in London. Its name is derived from that exchange as it’s not limited to Baltic trade routes. The Baltic Exchange publishes several other lesser-known freight indices, including two tanker indices and, more recently, a containership index.

The Baltic Exchange compiles the daily hire rate in USD from international shipbrokers for three types of bulk freight ships. 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. It’s based on raw materials because the demand for them portends the future. These materials are bought to construct and sustain buildings and infrastructure, not at times when buyers have either an excess of materials or are no longer constructing buildings or manufacturing products. Typically, demand for commodities and raw goods increases when global economies are growing.

Understanding the Baltic Dry Index

There is a fourth smaller class of ships, Handysize, but the BDI index does not include them. There are also various sub-classes of ships within these broad categories designed to be compatible with the Suez Canal and various ports worldwide. 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. 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.

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. The Baltic Exchange has separate indices for tankers and container ships. External research concluded that the contribution of the various dry bulk vessel types to the dry bulk market was 40% Capesize, 25% Panamax, 25% Supramax and 10% Handysize. 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.

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