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What Is the Baltic Dry Index – BDI?

The Baltic Dry Index (BDI) is a leading indicator for the likely direction of the stock market. It is a trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel. Members of the exchange directly contact shipping brokers to assess price levelsfor given shipping paths, a product to transport, and time to delivery or speed. The Baltic Dry Index is a composite of three sub-indices that measure different sizes of dry bulk carriers or merchant ships: Capesize, Panamax, and Supramax.

How the Baltic Dry Index – BDI Works

The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component vessels. Analyzing multiple geographic shipping paths for each index gives depth to the index’s composite measurement. Members contact dry bulk shippers worldwide to gather their prices and they then calculate an average. The Baltic Exchange issues the BDI daily.

The Sizes of BDI Vessels

The BDI measures shipments on various sizes of cargo ships. Capesize boats are the largest ships in the BDI with 100,000 deadweight tonnage (DWT) or greater. The average size of a Capesize ship is 156,000 DWT. This category can also include some massive vessels with capacities of 400,000 DWT. Capesize ships primarily transport coal and iron ore on long-haul routes and are occasionally used to transport grains. They’re too large to cross over the Panama Canal.

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. They can barely squeeze through the Panama Canal. The smallest vessels included in the BDI are Supramaxes, also referred to as Handymaxes. These ships have a carrying capacity of 45,000 to 59,999 DWT. They’re sometimes Although they’re close in size to Panamaxes, Supramaxes normally have specialized equipment for loading and unloading, and they’re used in ports where Panamaxes cannot.

The BDI As an Economic Indicator

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. The Baltic Exchange also operates as a maker of markets in freight derivatives, including types of financial forward contracts known as forward freight agreements.

Real World Example

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.
Stock prices increase when the global market is healthy and growing, and they tend to decrease when it’s stalled or dropping. The index is reasonably consistent because it depends on black-and-white factors of supply and demand without much in the way of influences such as unemployment and inflation.
The BDI predicted the 2008 recession in some measure when prices experienced a sharp drop. As of February 2019, Bloomberg indicates that the index is down more than 47% on the year, its lowest level in almost 24 months, according to the Hellenic Shipping News.

The Baltic Exchange’s main sea freight index fell for an eighth straight session on Thursday, as increased vessel supply and easing demand for shipping iron ore dragged down capesize rates, while soft South American orders hurt panamaxes.

  • The Baltic index, which tracks rates for ships ferrying dry bulk commodities, fell 3%, or 56 points, to 1,812 points.
  • The capesize index fell 123 points, or 3.4%, to 3,534 points.
  • Average daily earnings for capesizes, which typically transport 170,000 tonne-180,000 tonne cargoes such as iron ore and coal, fell $885 to $26,067.
  • The fleet has repositioned in a more balanced way with the Atlantic basin filling up … The amount of vessels heading to the Atlantic has resulted in a more cautious outlook amongst market players,” shipbroker Fearnleys said in a note.
  • However, cargo volumes remain at healthy levels so it is hard to believe in a dramatic market fall the next weeks.”
  • The panamax index fell 73 points, or 3.9%, to 1,818 points. The index was down for the seventh straight session.
  • Average daily earnings for panamaxes, which usually carry coal or grain cargoes of about 60,000 tonnes to 70,000 tonnes, decreased $582 to $14,547.
  • The market has taken a breather in both basins, and the summer-boom has taken a rapid turn to the red,” Fearnleys said.
  • However, the sentiment in the market is still positive for the longer term, and many expect rates to continue the increase or at least stabilize going forward.”

BDI Is A Leading Indicator

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