Baltic Dry Index (BDI)

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21 Aug, 2024

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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.

What is Baltic Dry Index?

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.

How Does Baltic Dry Index Work?

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.

Why Should Investors Watch Baltic Dry 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.

Real-World Example

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.

Interpretations

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).

Frequently Asked Questions (FAQs)

What is the Baltic dry index?

The Baltic dry index measures the transportation price of dry bulk raw materials by a shipping vessel. It gives a clear idea about the supply and demand of several raw materials being shipped. The index covers the transport of raw materials across 20 different routes.

How to trade the Baltic dry index?

The Baltic dry index is a powerful economic indicator that sheds light on the supply and demand of various goods. The shares of shipping companies transporting dry bulk goods are a great way to invest in the Baltic dry index. Investors can also trade in the commodities using the BDI index.

Why is the Baltic dry index falling?

The BDI index can drop due to a variety of reasons. A sudden shoot in the shipping price due to an increase in commodity demand is one reason. The access and availability of vessels also determine the index. The surge in prices of certain raw materials, seasonal fluctuations, traffic in the ports, and political events are some other factors that can affect the BDI index.