The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the Index tracks worldwide international shipping prices of various dry bulk cargoes.

The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

How it works

Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo).

The index is made up of an average of the Baltic Supramax, Panamax, and Capesize indices. These indices are based on professional assessments made by a panel of international shipbroking companies.

The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:^[3]

Ship Classification	Dead Weight Tons	% of World Fleet	% of Dry Bulk Traffic [4]
Capesize	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[5]

The BDI is based on US dollars, so it is also influenced by changes in the value of the US dollar.

The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from major financial information and news services such as Thomson Reuters and Bloomberg L.P..

Historical origin

The BDI traces its roots to the Virginia and Baltick Coffeehouse in London’s financial district in 1744.

Why economists and stock markets read it

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).

The supply of cargo ships is generally both tight and inelastic — it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert. So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. “if you have 100 ships competing for 99 cargoes, rates go down, whereas if you’ve 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates…” The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.

Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.

Because it provides “an assessment of the price of moving the major raw materials by sea,” according to The Baltic, “… it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade — devoid of political and other agenda concerns.”

Another index, the HARPEX, focuses on containers freight. It provides an insight on the transport of a much wider base of commercial goods than commodities alone.

Other leading economic indicators — which serve as the foundation of important political and economic decisions – are often massaged to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth. Unlike stock and bond markets, the BDI “is totally devoid of speculative content,” says Howard Simons, an economist and columnist at TheStreet.com. “People don’t book freighters unless they have cargo to move.”

Source: Wikipedia