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Baltic Dry Index

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.

The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.

Composition of the Index

The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices are determined by the buyers and sellers, and then the exchange takes 26 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation. It also factors in all four sizes of oceangoing dry bulk transport vessels:

Ship Classification Dead Weight Tons % of World Fleet % of Dry Bulk Traffic
Capemax 100,000+ 10% 62%
Panamax 60,000-80,000 19% 20%
Supramax 45,000-59,000 37% 18% w/ Handysize
Handysize 15,000-35,000 34% 18% w/ Supramax

A chart of the Baltic Dry Index is above, in the top right of the page. As you can see, the index can be quite volatile. The run up from 2005 to the end of 2007 was primarily due to Chinese demand for industrial precursors to production and its shift from coal exporter to importer. There was also a shortage of supply for dry bulk cargo ships and a large backlog at shipyards. The combination of these two factors caused a nearly 200% gain in the index. From June through October 2008, the index lost 85% of its value as demand for shipping plummeted. This is due to a simultaneous convergence of several factors. Chief among these is the rapid slowdown in the "global growth" phenomenon. In addition to this, credit has been nearly impossible to get for the purchase of goods and the payment of time charters on the vessels.

Source: wikinvest.com