Baltic Dry Index BDI Meaning, Interpretations, How it Works?

The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped.

Unfortunately, these stories rarely provide a more detailed analysis of whether the BDI is being driven by commodity market dynamics or shipping market technicals. That means investors need to do more digging to figure out what it means and how to position themselves accordingly. The BDI is a fundamental leading indicator of global economic activity and a technical indicator of freight industry capacity. For much of its history, the BDI has traded in a range between 1000 and 2000 (see the Baltic Dry Index chart below, Chart 2).

What Is the Economic Significance of the BDI?

The most direct instrument is forward freight agreements, which cover various shipping routes. The Baltic Exchange also operates as a maker of markets in freight derivatives, including types of financial forward contracts known as forward freight agreements. The Baltic Dry Index was established in 1985 by the London-based Baltic Exchange, an organization that provides data on maritime transportation and facilitates the trading and settlement of ship charter contracts. The B.D.I. justified economists’ belief in its predictive power almost immediately after its launch. In January, 1999, and again in April of that year, the B.D.I. revisited record-low territory, heralding a depressed global investment environment and shortfalls in consumer spending, factors that would soon help puncture the dot-com bubble.

Why Investors Watch the Baltic Dry Index

For example, the BDI may be rising because of higher oil prices – but profitability may fall if shippers can’t pass on that higher cost. Another strategy is going long or short oil depending on whether the price of oil is rising or falling; the idea is a rising BDI implies more shipping and higher demand for fuel. More generally, investors can monitor the BDI for a leading indicator of whether a recession or economic boom is coming, although these signals can be obscured by shipping technicals.

Why Do Central Banks Care About Wage Growth?

A rising or contracting index is considered to be a leading indicator of future economic growth. The BDI calculates the index by using multiple shipping rates across more than 20 routes which do tend to provide a broad perspective of the geographic shipping paths for the world economy. This shipping and trade index is considered to be a leading indicator of the future trend of the global economy. One can How to buy crypto without fees use the Baltic Dry Index to predict or forecast the probability of future economic activities increasing or decreasing globally.

The Baltic Dry Index can be accessed through the Baltic Exchange’s website or various financial news outlets and market data providers. There is a fourth smaller class of ships, Handysize, but the BDI index does not include them. There are also various sub-classes of ships within these broad categories designed to be compatible with the Suez Canal and various ports worldwide. Forex trading involves significant risk of loss and is not forex trading simulator zero risk & 100% free suitable for all investors. Believing the Baltic Dry to be fundamentally skewed, experts were content to ignore its recent performance, a stance that, while initially logical, turns out to have been myopic and wrongheaded.

The Baltic Dry Index (BDI) is a shipping freight-cost index issued daily by the London-based Baltic Exchange. The BDI is a composite of 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. Panamax ships have a 60,000 to 80,000 DWT capacity, and they’re used mostly to transport coal, grains, and minor bulk products such as sugar and cement. Panamax cargo ships require specialized equipment for loading and unloading.

Tankers can be loaded or unloaded within a day or so and prepared for a new voyage within days. Dry bulk ships require a week or more to load or unload cargo, and it can take weeks to clean and prepare a ship for new cargo. The BDI is a summary indication of the cost to ship bulk cargo over 20 standard ocean routes (the Appendix has a list of routes).1 In other words, it indicates dry bulk shipping rates.

→ What is BDI?

1. And they account for 30% of the total value of $14 trillion of cargo shipped annually.
2. The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate.
3. Tankers can be loaded or unloaded within a day or so and prepared for a new voyage within days.
4. Other types include cement, forest products, some steel products, copper, and other base metals such as lead and nickel.
5. All of these require extensive amounts of raw materials and their wide range of transportation.
6. The index can experience high levels of volatility if global demand increases or suddenly drops off because the supply of large carriers tends to be small with long lead times and high production costs.

Various futures exchanges also offer freight futures contracts, including the European Energy Exchange and the Singapore Exchange. Bulk cargo is distinct from general cargo, which refers to cargo shipped in some packaged form, whether in sacks or palettes or some other organized or grouped manner. The 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. Some websites offer historical BDI data, allowing users to analyze long-term trends and draw comparisons between different time periods.

The index best showed its foresight in 2008, however, when it lost more than twenty-five per cent of its value between May and July. The dip in the B.D.I. presaged IndyMac’s bankruptcy, the first major bank failure of the global financial recession. When the index experiences a sharp downturn, it may mean that the shipping industry is in distress or something has affected the global economy in a negative way alpari review (pandemic, financial crisis). Contrarily, if it experiences an abrupt increase, it may be signaling something has affected the global economy in a positive way (trade deals, increased demand). Investors and the financial press pay far more attention to the BDI than to other freight indices. Apart from having been around longer, it is far more dynamic and exciting than its tanker cousins and makes for more dramatic headlines.