Baltic Dry Index

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The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. 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."[1]


Contents

[edit] Historical origin

The BDI traces its roots to the Virginia and Baltick Coffeehouse in London's financial district in 1744.

[edit] How it works

Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo). [2]

The index is made up of an average of the Baltic Supramax, Panamax, and Capesize indices. These indices are based on professional assessments made by a panel of international shipbroking companies.

The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:[3]

Ship Classification Dead Weight Tons % of World Fleet % of Dry Bulk Traffic [4]
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[5]


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..

[edit] Why economists and stock markets read it

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. 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 California desert. 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..."[6] The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

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.[7]

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."[2]

Other leading economic indicators — which serve as the foundation of important political and economic decisions - are often massaged 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."[2]

[edit] 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.[8], though by 4 February 2009 it had recovered a little lost ground, back to 1,316.[9] These low rates move dangerously close to the combined operating costs of vessels, fuel, and crews.[10][11]

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.[12][13] This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.

[edit] References

  1. ^ Baltic Exchange
  2. ^ a b c Why you should care about The Baltic Dry Index
  3. ^ Data from Wikinvest, "Composition of the Baltic Dry Index"
  4. ^ This is measured in terms of the tonnage of cargo carried multiplied by the distance traveled
  5. ^ Lamb, Thomas. Ship Design and Construction. Jersey City: Society of Naval Architects and Marine Engineers. ISBN 0939773406 and CIA World Factbook 2005. Data slightly dated as there has been increased construction in the Capemax size the past three years
  6. ^ http://www.economist.com/business/displayStory.cfm?story_id=12414753&source=features_box1&mode=comment&intent=readBottom
  7. ^ Commodity indicators Show Strain On Bull (market)
  8. ^ Collapse in dry bulk shipping rates unprecedented in its severity
  9. ^ Commodity Shipping Index Advances the Most Since at Least 1985
  10. ^ Marine Shippers Scuttled As Baltic Measure Hits Low
  11. ^ Baltic Dry Index Drops Below 1,000 for First Time in Six Years
  12. ^ Asian shipyards face prospect of bankruptcy
  13. ^ Shipper Industrial Carriers Files for Bankruptcy

[edit] External links


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