Decoding the Baltic Dry Index

Decoding the Baltic Dry Index

Among a multitude of economic indices, what significance do shipping indices have, and why does the Baltic Dry Index (BDI), in particular, stand out?

Among a multitude of economic indices, what significance do shipping indices have, and why does the Baltic Dry Index (BDI), in particular, stand out?

The business section of any publication is usually chock full of indices like the S&P, ZEW and the CPI, all of which are used by investment professionals to help gauge the health of the economy. However, when it comes to the shipping industry, which is responsible for moving the vast majority of traded goods across the world’s oceans, shipping indices are the best way to assess how well the market is doing.

There are a number of shipping indices, each of which tells a different story, based on ship sizes, age and regional concentration. For instance, the Clarkson index, the Howe Robinson index and the Harper Petersen Index (HARPEX), among others, are charter rate indices used in the container shipping segment. Freight rate indices for the same segment include the China Containerized Freight Index, the Shanghai Containerized Freight Index and the Drewry Containerized Freight Index. Meanwhile, the Dow Jones Global Shipping Index is more of a typical stock index, as it follows the equity performance of 25 companies in the shipping sector.  

A barometer of economic health

Among all these indices, the Baltic Dry Index (BDI) is of special importance in gauging the health of the world economy. Created by the London-based Baltic Exchange, the BDI measures the supply and demand for bulk cargo, which is often just one kind of raw material per shipment.

Movements in the BDI index give insight into the demand for metals, minerals, grains and building materials. Since the BDI materials are raw material inputs for making end products, the index is viewed by many as a leading economic indicator of industrial production and economic activity, forming the basis for political and economic decision-making.

‘“There could be a surge in Chinese iron ore imports to support infrastructure projects or a robust grain harvest in Brazil. Monitoring physical trade flows using aggregated satellite data of all the various vessel classes provides a much better view of not only the physical movement of goods but also the distance they are being shipped,” says Court Smith, a trade analyst at VesselsValue Ltd.

Smith says the general public too can use the BDI as a good proxy for the physical economy and, as an expert, he finds it useful because, in times of higher volatility, it could explain a wide variety of events.

Additionally, the BDI has a lot working in its favour.

“Compared to other indices, the BDI is difficult to be influenced by governments, associations or speculators. It is driven by clear forces of demand for commodities and the supply of ships,” says Capt. Amrit Singh, a shipping analyst at Refinitiv.  

Reading it right

While the BDI is difficult to manipulate, some experts claim it is not impossible. 

“The BDI is now biased towards the larger sectors in order to create more volatility for traders, so it’s not the best way to look at how the market is doing,” says Peter Sand, Chief Shipping Analyst at BIMCO Shipping Association.

Sand contends that the BDI reads the balance of supply and demand in the bulk sector only, and, while many analysts use it as a leading indicator for growth, they tend to forget that it’s not only a demand-driven index and that they should also consider the ship supply side.

Instead, Sand prefers to follow individual Time Charter Equivalent (TCE) estimates for a basket of trades for individual ship types, such as Cape, Panamax, Supramax, Handysize, as he says they provide “much more information on profits and losses, as you can compare directly income (freight rates) to costs (operating and capital expenditures).”

Sand also argues that much of the global economy today is driven by intangible goods or services, with the movement of physical goods being not as important as it was 40 years ago.

While that may be true, there is no denying that massive commodity price swings and trade conflicts have dominated the financial headlines from 2015 to 2018. In light of this, shipping indices like the BDI may prove to be just as valuable as ever in the current economic environment.

Written by
Derek Silva