The Baltic Dry Index, 1985-2022 – K3 Engineering Solutions

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 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 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. Investors and the financial press pay far more attention to the BDI than to other freight indices.

  1. Analyzing multiple geographic shipping paths for each index gives depth to the index’s composite measurement.
  2. 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.
  3. There are few players since several global shipping companies went bust driving a higher increase in the cost of shipping.
  4. Various futures exchanges also offer freight futures contracts, including the European Energy Exchange and the Singapore Exchange.
  5. The shipping industry’s bellwether, the Baltic Dry Index, hit a 10-year high this week propelled by a rally in commodities.

Likewise, when commodity demand softens, people do not need the volume that Capesize offers. There have been brief periods when the Capesize index dropped below zero, implying that shippers were losing money to keep their ships busy. 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. 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.

It is “an everything rally” writes Ole Hansen, head of commodity strategy at Saxo Bank, in a note, with all major commodities rising recently, including Arabica coffee, corn, corn and lumber. There was also a surge for metals – copper reached a record high and gold supported by silver broke above $1,800. The BDI itself is not a security that traders can buy or sell on the market, but it is a bellwether for what traders can expect from shipping stocks. 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. 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.

It is the world’s largest steel producer – over a record 1.05 billion tonnes of it in 2020. Its steel consumption is estimated by China Metallurgic Industry Planning and Research Institute (MPI) to rise further in 2021, reaching 1.065 billion tonnes up 1.4% year on year. Among them is a growing economic malaise in developing countries, which is stalling poverty reduction and hurting attempts to expand the middle class. Such sluggishness is also crimping multinational earnings, evident not only in corporations’ quarterly results but also in the recent softness in the U.S. job market. And economically advanced countries like Germany and Japan have seen their industrial production decline as a result of trade shortfalls.

It’s a low that wasn’t fueled entirely by weak economic activity, although slowing growth in China certainly didn’t help matters. Instead, the low was caused by shippers overbuilding ships in 2013 based on the assumption that robust Chinese demand azure cloud engineer job description for coal would continue, only to see coal demand weaken just when a number of new vessels were coming to the market in 2015. The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe.

→ What is a Capsize vessel?

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. 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 of the current freight cost on various routes by a a panel of international shipbrokers. Typically, demand for commodities and raw goods increases when global economies are growing.

Apart from having been around longer, it is far more dynamic and exciting than its tanker cousins and makes for more dramatic headlines. Unfortunately, these stories rarely provide a more detailed analysis of whether the BDI is being driven by commodity market dynamics or shipping market technicals. That means investors need to do more digging to figure out what it means and how to position themselves accordingly. 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. The BDI predicted the 2008 recession in some measure when prices experienced a sharp drop.

Significant levels

It started compiling pricing information on various commodities and disseminating them in an early version of indices. By the second half of the 19th century, it was becoming more international, and its scope expanded to include agricultural commodities. The Baltic Exchange’s dry bulk sea freight index fell to a two-week low on Thursday, as weakness in rates for smaller vessels countered an uptick in the capesize segment. The Baltic Exchange’s dry bulk sea freight index fell on Tuesday, logging its biggest decline in over two weeks on lower rates across all vessel segments. 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 in a range between 1000 and 2000 (see the Baltic Dry Index chart below, Chart 2).

It measures changes in the cost of transporting various raw materials, such as coal and steel. That said, it’s not a perfect measurement because that demand is weighted against the supply of available ships, which can grow faster than demand due to poor planning. For example, when times are good, shippers are flush with cash that is, more often than not, spent on new ships.

Where is the risk of inflation?

Shipping companies are reaping the rewards from high freight and increased trade. “Over the last 12 months, the demand for bulk carriers was primarily driven by China, but now the rest of the world have joined in with a strong rebound in demand for industrial commodities,” he said. In 1985, the Baltic Exchange started compiling the Baltic Freight Index for dry bulk cargo on defined ocean routes. It polled shipbrokers daily on the cost to ship cargo and compiled them into an index. The Baltic Exchange also developed freight derivatives, in particular the freight forward agreement (FFA) that allows shippers and merchants to hedge and lock in the cost of shipping commodities.

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 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. Since November 2, the BDI has risen eight consecutive days from 834 to 1,084.

The Baltic Exchange also operates as a maker of markets in freight derivatives, including types of financial forward contracts known as forward freight agreements. 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, top-rated podcasts, and non-profit The Motley Fool Foundation.

The BDI is a measure of daily charter rates for a range of dry bulk shipping carrier sizes, including handysize, supramax, panamax and capesize. These dry bulk carriers carry raw materials, such as coal and iron ore, overseas. 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.

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. You should interpret the Baltic Dry Index as a reliable indicator of average shipping costs of dry bulk cargo over 20 standard ocean routes. 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.

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