Baltic Dry Index (BDI) is One of the most popular tools for measuring international business activity tracking prices for freight bulk cargo by sea based in London. BDI has been calculated since 1999, with the initial name Baltic Freight Index (BFI) which has been in effect since 1985. This calculation is based on the weighted average cost of transporting various types of vessels.
In its current form, the Baltic Exchange Dry Index has been calculated since 1999. Its predecessor was the Baltic Freight Index (BFI), which has been in effect since 1985. It is based on a weighted average cost of carriage for different types of vessels that also differ in their trade routes.
Based on the size of the ship, there are 3 types of BDI classification, namely:
* Capenize which has a weight in BDI of 40% with the characteristics of the largest dry cargo ship;
* The Panamax has a weight in BDI of 30% with a medium ship feature adapted for the Panama Canal route;
* Supramax has a weight in BDI of 30% with the characteristics of a relatively small ship.
Every weekday, international brokers provide an estimate of the average cost of transporting various types of vessels on 22 significant sea routes. The indicators obtained are weighted both to calculate the general BDI index and the index for each type of vessel. Since the construction of a new ship takes an average of 2 years, the BDI value is mainly influenced by demand i.e. the higher the index, the greater the index value.
About the Baltic Dry Index
1 Recalculated every day;
2 Expressed in points;
3 The basis for the calculation is the estimated cost of chartering a cargo ship per day (in dollars);
4 The main goods transported by dry cargo are building materials, iron ore, coal, grain;
5 Only companies engaged in real transportation are involved in calculating the index, which reduces the possibility of price manipulation;
6 Speculative activity on the Baltic Dry Index is very limited due to the low popularity of derivatives on this index.
Although the Baltic Dry Index is known primarily for ships carrying bulk cargo, it is also calculated separately for tankers, gas carriers and container ships. In addition, it is used to calculate operating cost indicators for dry cargo ships (DOPEX), gas carriers (GOPEX) and tankers (TOPEX).
Why is the Baltic Dry Index needed by investors?
The BDI metric immediately reflects the demand for sea freight which also reflects the demand for raw materials used in the production of goods such as concrete, electricity, steel and food. Therefore, the value and dynamics of BDI allows investors to:
– Assessing the business activities of the sea transport service consumer-sector;
– Analyzing indirectly the state of the world trade economy, industrial and agricultural sectors;
– Considering the economic situation in the area of suppliers and consumers of raw materials;
– To forecast the development of global economic activity.
The Baltic Dry Index (BDI) is a trading index calculated daily by the Baltic Exchange at 13:00 London time. The index reflects the cost of transporting dry cargo by sea on twenty major trade routes and includes transportation carried out by Handymax or Supramax, Panamax and Capesize class dry cargo ships.
The price of the main contract for the transportation of raw materials is determined by the participants in the transaction, the task of the broker of the Baltic Stock Exchange is only to calculate the index with the average contract price for the transportation of dry cargo on 22 major sea trading routes.
The index is one of the most objective indicators of economic activity, because it measures demand for raw materials in real time. Meanwhile, other economic indicators, such as consumer spending data or the consumer price index, look at what has happened. In addition, the Baltic Dry Index study is more effective than analyzing market prices for raw materials, where factors such as the effect of substitute goods and futures contracts make it difficult to interpret the impact of changes in raw material prices.
As the Baltic Dry Index grew, only ship owners carrying cargo got additional profits, while cargo owners increased their freight costs, so to cover these costs, they increased the prices of products made from these raw materials.
When the index declines, both producers and consumers benefit, as costs and therefore prices for end users are reduced. However, there is a downside. The prolonged and strong decline in the Baltic Dry Index means that the demand for transportation of raw materials is falling, indicating a general decline in production, and therefore, a slowdown in global economic development.
The following is a list of shipping companies whose freight prices affect the calculation of the Baltic Dry Index and whose shares are traded on the US trading exchange, namely:
DryShips Inc. (NASDAQ: DRYS)
Eagle Bulk Shipping Inc. (NASDAQ: EGLE)
Seanergy Maritime Holdings Corp. (NASDAQ:SHIP)
Star Bulk Carriers Corp. (NASDAQ: SBLK)
Euroseas Ltd. (NASDAQ: ESEA)
FreeSeas Inc. (NASDAQ: FREE)
Diana Shipping Inc. (NYSE: DSX)
Genco Shipping & Trading Limited (NYSE: GNK)
Excel Maritime Carriers Ltd (NYSE: EXM)
Navios Maritime Holdings Inc. (NYSE: NM)
Safe Bulkers, Inc. (NYSE: SB)
Paragon Shipping Inc. (NYSE: PRGN)
Navios Maritime Partners LP (NYSE:NMM)
Frontline Ltd. (USA) (NYSE: FRO)
Baltic Dry Index Future Economic Growth Indicator
The Baltic index works based on input tariff data from the capesize, panamax, and supramax indices. The fluctuations that occur in the Baltic Dray Index reflect fluctuations in the supply and demand for sea freight of the three indices of ships in various commodity markets.
If the average sea freight rate increases, it means that the demand for raw material commodities to meet the raw material needs of various production sectors increases. This will make the price of raw material commodities also increase.
On the other hand, if the average sea freight rate decreases, it means that the demand for raw material commodities will decrease, so the price will also decrease.
In short, the Baltic Dry Index reflects global supply and demand trends for raw material commodities as well as production trends. This is what makes the Baltic Dry Index considered a leading indicator and can be used to project future production and economic growth.
