Baltic Dry Index (BDI)

The Baltic Dry Index (BDI) is a measurement used in economics to track international demand for dry raw materials and its cost to transport them by shipping vessel. The index considers various vessel classifications that travel to different destinations and produces a daily report issued on The Baltic Exchange located in London.

The index is a critical indicator for investors to watch as the value is derived from the demand for raw materials and the supply of ships available to transport them. In addition, investors can use the changes in the index value as a determinant of future economic developments.

• The Baltic dry index (BDI) measures the cost to ship raw materials by shipping vessel. The index accounts for multiple vessel classifications traveling to and from various destinations.
• The index’s value is generated by the demand for the raw materials and the supply of ships available to transport them.
• Investors can use the index to forecast and predict future industrial economic activity changes globally.
• As economies expand, they generally require additional raw materials to complete the projects, leading to higher demand.  

The Baltic dry index was initially referred to as the Baltic Freight Exchange (BFI), which started in 1985. It transformed to keep up with the demand for accurate financial shipping information, especially when it comes to commodities.

The Baltic Dry Index (BDI) is one of the most important economic indicators to measure the global economy’s health. The index consists of multiple vessel classifications that carry the materials to their destination.

To generate the index, members of the Baltic Exchange will contact various shipbrokers worldwide to assess the different prices they are charging for their services. After the submission of the numbers, the members will analyze the information and produce the index amount.

The Baltic Dry Index (BDI) is important because its value directly results from the supply and demand for raw materials and the cost to ship them. When the index changes in value, investors can look at it as a reflection of changes in economic activity and, in particular, infrastructure projects. As the value of the index increases, it suggests that more materials are in demand and vice versa.

According to the Baltic Exchange’s website, the Baltic Dry Index comprises three different vessel types. These include:

#1 - Baltic Capesize Index (40%)

The Baltic Capsize Index is the largest vessel classification of dry bulk materials, typically carrying iron ore or coal commodities. The capsize index consists of routes such as:

• Tubarao, Brazil to Rotterdam, Netherlands
• Tubarao, Brazil to Qingdao, China
• West Australia to Qingdao, China
• Bolivar, Venezuela to Rotterdam, Netherlands
• And China to Brazil round voyage

#2 - Baltic Panamax Index (30%)

The Baltic Panamax Index is another vessel classification of dry bulk materials that generally carries coal and various grains. A few of the routes included in the Panamax Index include:

• South China to Indonesia round voyage
• Transatlantic (U.S, Canada, Latin America) round voyage
• Japan to South Korea
• Singapore round voyage
• Taiwan to Japan
• Santos, Brazil to Qingdao, China

#3 - Baltic Supramax Index (30%)

The Baltic Supramax Index consists of medium-sized vessels that carry raw materials like cement and iron ore. The routes can consist of the following:

• Canakkale, Turkey to China/ South Korea
• U.S Gulf Coast to China/ South Japan
• North China to West Africa
• West Africa to North China (via east coast South America)
• South China to East Coast India (via Indonesia)

The Baltic Dry Index accounts for handysize vessels (smaller size vessels). However, the exchange later decided to stop averaging them into the index on March 1, 2018. In fact, the Chief executive of the Baltic Exchange, Mark Jackson, said the move was “simply the next phase of development” for the index.

Keeping track of the Baltic Dry Index can help investors look for insights into the international demand for raw materials and the shipping industry outlook. Investors can then analyze the need for raw materials like iron ore and cement to understand and forecast future financial market trends.

Observing this index can give investors hints into the global demand for certain raw materials. If the economy grows and expands, it will generally result in additional infrastructure projects and developments, resulting in higher demand for raw materials. The infrastructure projects can include:

• Roads
• Bridges
• Airplanes/ Airports
• Railroads
• Energy infrastructure

All of these require extensive amounts of raw materials and their wide range of transportation. But, if the global economy is shrinking, one would need fewer materials, resulting in lower prices resulting from lower demand. However, demand is only part of the equation – supply is also an essential factor in determining prices.

Luckily, the law of supply and demand helps to influence commodity prices and allows the index to stay relatively consistent over the years. Furthermore, since the index is updated in real-time daily, the information is accurate and applicable to real-world situations. But, it is critical for investors to understand that the Baltic Dry Index is not a perfect representation of global demand. With that being said, however, it can still be a helpful indicator to predict international economic activity.

Let us consider the history of the Baltic Dry Index since 2002. During the global financial crisis of 2007-08, the demand for raw materials took a major hit as many countries were experiencing financial distress. Hence the index has fallen steeply towards the end of 2008. As the crisis began to subdue, demand picked up relatively quickly and maintained the level up until recently, disregarding minor fluctuations. 

But in 2020, as the Coronavirus pandemic raced across the globe, causing massive shutdowns, the demands for goods lowered again. 

One can use the Baltic Dry Index to predict or forecast the probability of future economic activities increasing or decreasing globally. Since the materials being delivered on these ships are generally used in industrial and manufacturing production, it can give clues as to the demand for the materials and whether that demand is increasing or decreasing over time.

If the BDI index is beginning to increase, it can be interpreted as infrastructure projects starting to rise, resulting in an expanding global economy.

If the BDI index is beginning to decrease, it can be interpreted as a decrease in infrastructure projects resulting in a shrinking global economy.

When the index experiences a sharp downturn, it may mean that the shipping industry is in distress or something has affected the global economy in a negative way (pandemic, financial crisis). Contrarily, if it experiences an abrupt increase, it may be signaling something has affected the global economy in a positive way (trade deals, increased demand).

This has been a guide to Baltic Dry Index (BDI) and its meaning. Here we discuss what it is and how it works along with interpretations and examples. You can learn more from the following articles -

• Commodity Market
• Commodity Derivatives
• Decoupling