Baltic Dry Index
Encyclopedia
The Baltic Dry Index 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
."
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:
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.
.
. 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 the Mojave
and Sonoran
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..."
The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal
, metallic ores
, and grain
s.
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.
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."
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."
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. 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
.
Baltic Exchange
The Baltic Exchange is the world's only independent source of maritime market information for the trading and settlement of physical and derivative contracts...
. Not restricted to Baltic Sea
Baltic Sea
The Baltic Sea is a brackish mediterranean sea located in Northern Europe, from 53°N to 66°N latitude and from 20°E to 26°E longitude. It is bounded by the Scandinavian Peninsula, the mainland of Europe, and the Danish islands. It drains into the Kattegat by way of the Øresund, the Great Belt and...
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
Handymax
Handymax and Supramax are naval architecture terms for a bulk carrier,in a series that is called Handysize class. Handysize class consists of Supramax , Handymax , and Handy Handymax and Supramax are naval architecture terms for a bulk carrier,in a series that is called Handysize class. Handysize...
, Panamax
Panamax
Panamax and New Panamax are popular terms for the size limits for ships traveling through the Panama Canal. Formally, the limits and requirements are published by the Panama Canal Authority titled "Vessel Requirements"...
, and Capesize
Capesize
Capesize ships are cargo ships originally too large to transit the Suez Canal . To travel between oceans, such vessels used to have to pass either the Cape of Good Hope or Cape Horn. In effect Capesize reads as "unlimited"...
dry bulk carriers carrying a range of commodities including coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
, iron ore and grain
GRAIN
GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...
."
Historical origin
The Baltic Exchange traces its roots to the Virginia and Baltic Coffeehouse in London's financial district in 1744.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
Panamax
Panamax and New Panamax are popular terms for the size limits for ships traveling through the Panama Canal. Formally, the limits and requirements are published by the Panama Canal Authority titled "Vessel Requirements"...
, and Capesize
Capesize
Capesize ships are cargo ships originally too large to transit the Suez Canal . To travel between oceans, such vessels used to have to pass either the Cape of Good Hope or Cape Horn. In effect Capesize reads as "unlimited"...
indices.
The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:
| Ship Classification | Dead Weight Tons | % of World Fleet | % of Dry Bulk Traffic |
|---|---|---|---|
| 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 |
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
Thomson Reuters
Thomson Reuters Corporation is a provider of information for the world's businesses and professionals and is created by the Thomson Corporation's purchase of Reuters Group on 17 April 2008. Thomson Reuters is headquartered at 3 Times Square, New York City, USA...
and Bloomberg L.P.
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
.
Why economists and stock markets read it
Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriersBulk carrier
A bulk carrier, bulk freighter, or bulker is a merchant ship specially designed to transport unpackaged bulk cargo, such as grains, coal, ore, and cement in its cargo holds. Since the first specialized bulk carrier was built in 1852, economic forces have fueled the development of these ships,...
. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
).
The supply of cargo ships is generally both tight and inelastic
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...
— 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 the Mojave
Mojave Desert
The Mojave Desert occupies a significant portion of southeastern California and smaller parts of central California, southern Nevada, southwestern Utah and northwestern Arizona, in the United States...
and Sonoran
Sonoran Desert
The Sonoran Desert is a North American desert which straddles part of the United States-Mexico border and covers large parts of the U.S. states of Arizona and California and the northwest Mexican states of Sonora, Baja California, and Baja California Sur. It is one of the largest and hottest...
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..."
The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal
Coal
Coal is a combustible black or brownish-black sedimentary rock usually occurring in rock strata in layers or veins called coal beds or coal seams. The harder forms, such as anthracite coal, can be regarded as metamorphic rock because of later exposure to elevated temperature and pressure...
, metallic ores
Ore
An ore is a type of rock that contains minerals with important elements including metals. The ores are extracted through mining; these are then refined to extract the valuable element....
, and grain
GRAIN
GRAIN is a small international non-profit organisation that works to support small farmers and social movements in their struggles for community-controlled and biodiversity-based food systems. Our support takes the form of independent research and analysis, networking at local, regional and...
s.
Because dry bulk primarily consists of materials that function as raw material
Raw material
A raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state. Latex, iron ore, logs, and crude...
inputs to the production of intermediate or finished goods, such as concrete
Concrete
Concrete is a composite construction material, composed of cement and other cementitious materials such as fly ash and slag cement, aggregate , water and chemical admixtures.The word concrete comes from the Latin word...
, electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
, steel
Steel
Steel is an alloy that consists mostly of iron and has a carbon content between 0.2% and 2.1% by weight, depending on the grade. Carbon is the most common alloying material for iron, but various other alloying elements are used, such as manganese, chromium, vanadium, and tungsten...
, and food
Food
Food is any substance consumed to provide nutritional support for the body. It is usually of plant or animal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals...
, the index is also seen as an efficient economic indicator
Economic indicator
An economic indicator is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles....
of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.
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."
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."
Impact of 2008 financial crisis
On 20 May 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; though by 4 February 2009 it had recovered a little lost ground, back to 1,316. These low rates moved dangerously close to the combined operating costs of vessels, fuel, and crews.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
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
, 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. 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
2010–2011 Queensland floods
A series of floods hit Australia, beginning in December 2010, primarily in the state of Queensland including its capital city, Brisbane. The floods forced the evacuation of thousands of people from towns and cities. At least seventy towns and over 200,000 people were affected. Damage initially was...
.