The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange.It is measure of the correlation between the supply of large super bulk cargo ships (across three different sizes), and the demand to utilize the ships and their trade routes. It is a composite index that helps to assess freight costs on various routes throughout the globe.
The BDI comprises the Capesize, Panamax, and Supramax Timecharter Averages.It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.
BDI is the successor to the Baltic Freight Index (BFI) and came into operation on 1 November 1999. The BDI continues the established time series of the BFI, however, the voyages and vessels covered by the index have changed over time so caution should be exercised in assuming long term constancy of the data.
WORKING OF BALTIC DRY INDEX
Here, let’s talk about it’s working ;BDI is based on daily assessments of the 20 routes.The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component vessels. Analyzing multiple geographic shipping paths for each index gives depth to the index’s composite measurement. Members contact dry bulk shippers worldwide to gather their prices and they then calculate an average. The Baltic Exchange issues the BDI daily. The BDI contains route assessments based only on time-charter hire rates “USD hire paid per day”.The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from some financial information and news services such as Bloomberg and Reuters.
Components of the Baltic Dry Index
1. Capesize Index
The Capesize Index Includes the five routes below:
China to Japan Transpacific
Continent/Mediterranean China to Japan
China via Australia or Indonesia
2. Panama Index
The Panama Index includes the five routes below:
Hong Kong to South Korea round trip
Skaw (most northern point of Denmark) – Gibraltar Transatlantic voyage
Hong Kong to South Korea Skaw – Gibraltar
Dely Spore around the Atlantic (US grains)
Hong Kong to South Korea with Taiwan through the Pacific
3. Supramax Index
The Supramax Index includes the ten routes below:
Med or Bl Sea to China-South Korea
US Gulf to China-South Japan
North China to Australia or Pacific round trip
North China to West Africa
US Gulf to Skaw-Passero
Skaw-Passero to US Gulf
West Africa to China via South America (east coast)
South China via Indonesia to India (east coast)
West Africa to Skaw-Passero via South America (east coast)
CURRENT SITUATION OF BALTIC DRY INDEX
The Baltic Exchange’s main sea freight index continued to hold steady above the 1,725 mark in July mainly driven by rising demand for iron-ore from China as economic activity resumed after coronavirus-induced lockdowns. Still, the index remains below the nine-month peak of 1,956 touched on July 6th, as an increase in new Covid-19 cases worldwide threatens to disrupt global supply chains once again. The Baltic Dry Index is reported daily by the Baltic Exchange in London. The index provides a benchmark for the price of moving the major raw materials by sea. The index, tracks rates for capesize, panamax and supramax vessels that ferry dry bulk commodities. The Baltic Dry Index is not restricted to Baltic Sea countries or to a few commodities like crude oil. Instead, the Baltic Dry Index takes into account 23 different shipping routes carrying coal, iron ore, grains and many other commodities.
UNDERSTANDING THE BALTIC DRY INDEX
▪️The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange.
▪️To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe.
▪️Once they have obtained these numbers, they compile them and find an average. To ensure they are getting a comprehensive view of the entire shipping industry when looking at various shipping costs, the Baltic Exchange looks at costs for each of the following four sizes of ships:
1.– Capemax (10 percent of the global fleet): ships that can carry 100,000+ dead weight tons of cargo and are too big to pass through the Panama Canal
2.– Panamax (19 percent of the global fleet): ships that can carry 60,000-80,000 dead weight tons of cargo and can barely fit through the Panama Canal
3.– Handymax, or Supramax (37 percent of the global fleet): ships that can carry 45,000-59,000 dead weight tons of cargo
4.– Handysize (34 percent of the global fleet): ships that can carry 15,000-35,000 dead weight tons of cargo
Investors are always looking for practical economic indicators they can use to help them make informed investing decisions. Peter Lynch, the famous manager of the Fidelity Magellan Fund, talked about looking for practical indicators in the world around you—lik looking at what products your friends are buying or what stores always seem to be crowded.
The Baltic Dry Index (BDI) is a practical economic indicator on a global scale.
The exchange also publishes indices covering oil tankers transporting both crude oil and refined products. The movement of this indicator is difficult to interpret, because tankers can be used to ship oil when demand is high or to store oil when demand is low.
WHY BALTIC INDEX IS IMPORTANT?
Baltic index better helps you to understand the market trends wether you’re an institutional investor, a daily trador or looking to invest their saving for Long term.
1.If you are a retailer or supply chain manager, understanding the BDI and its trends can help you make more informed decisions with regards to purchasing the raw materials needed to manufacture goods or the overall final cost of a product. It is likely that if shipping costs climb, then the overall wholesale cost of a completed item will go up, and a retailer will consequently need to raise prices in order to secure their margins.
2.If you are a supply chain manager attempting to procure raw materials for your company, understanding the BDI can help you make more informed decisions on whether or not to write contracts where you purchase raw commodities from a long or short position in order to secure competitive pricing.
3.If you see the BDI drop uncharacteristically, it can be an early warning sign that we may see an upcoming, or are in the middle of, an economic downturn.
4.This is crucial for investors when they are timing their trades or attempting to ascertain their risk tolerance and long-term liquidity position. The BDI is another tool in the savvy investor’s tool belt that can help you stay informed and ahead of any market downturns (or perhaps create a short position to capitalize on the scenario).