The Baltic Dry Index

The Baltic Dry index (BDI) is a number issued every working day by the London based Baltic Exchange; its members are asked how much it costs to book various cargoes of raw materials on various routes. The index provides an assessment of the price of moving the major raw material by sea. Cargoes consist of fuel, foodstuffs, fertilisers, construction material & other raw goods moved by sea. Container traffic is just over 10% by weight, but much higher in terms of value.

The Baltic Exchange member’s arrange ocean transportation of industrial bulk commodities from producer to end user. The bulk freight market relies on the co-ordination of shipbrokers & shipowners to ensure the free flow of trade. With a total membership of over 550 companies, of that approximately 400 Baltic member companies are based in the U.K with membership growing in the USA, Europe & the Far East.

The Baltic Exchange is a company limited by share & owned by its shareholders, most of who are member companies. The Baltic is governed by a board of between 12 & 15 directors. The Baltic Exchange follows a Code (of practice) that contains guidance for Baltic brokers that all members that are required by the rule of the Baltic Exchange to have thorough knowledge & to comply with the provisions in the code.

Freight rate fluctuates due to a wide range of external variables, but are fundamentally driven by the following factors,
• Fleet supply - how many types of ships are available
• Commodity demand - what are levels of production, industry performance
• Seasonal pressures - harvest sizes, ice imports & river levels
• Bunker prices - fuel accounts for between one quarter & one third of cost of running a vessel, oil prices movements affect shipowners
• Choke points - ships such as large oil tankers passing through a narrow shipping lanes
• Market sentiment - half of the demand side is known in a time, market opinion affects the freight market just as much as the actual supply & demand of ships & cargo.

The BDI measures the demand for shipping capacity versus the supply of bulk carriers. The demand for shipping varies with the amount to cargo that is being traded or moved in varies markets.

The supply of cargo ships is generally both tight and inelastic (quantity stays the same but the price moves up and down). Marginal increases in demand can push the index higher quickly & marginal demand decreased can cause it to fall rapidly, thus the index indirectly measures the global supply & demand for the commodities shipped abroad.

Since the index consists of raw material that functions for production or finished goods, the index is an efficient economic indicator of FUTURE ECONOMIC GROWTH & PRODUCTION, thus the index is termed a leading economic indicator.

Below is a graph taken from the AUSTRALIAN FINANCIAL REVIEW on the 6th of February 2009 showing the BDI from 9th of February 2008 to 9th February 2009.



Below is a graphs taken from the AUSTRALIAN FINANCIAL REVIEW on the 10th of February 2009 again show the previous 9 year movement of the Baltic Dry Index. The Shanghai Composite Index is a comparison of the the past year.