Understanding the Baltic Dry Index

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—like 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.

[VIDEO] 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:

– 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

– 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

– Handymax, or Supramax (37 percent of the global fleet): ships that can carry 45,000-59,000 dead weight tons of cargo

– Handysize (34 percent of the global fleet): ships that can carry 15,000-35,000 dead weight tons of cargo

Why Investors Watch the Baltic Dry Index

The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects.

Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing.

The Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate. Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand.

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. Nobody is going to pay to book a Capemax cargo ship who isn’t actually going to use it.

Interpreting the Baltic Dry Index

The Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases.

Here’s what it typically means when the Baltic Dry Index turns around and starts moving UP:

– Global economies are starting to, or continuing to, grow

– Companies are starting to, or continuing to, grow

– Stock prices should start to, or continue to, increase in value

– Commodity prices should start to, or continue to, increase in value

– The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, increase in value

Here’s what it typically means when the Baltic Dry Index turns around and starts moving DOWN:

– Global economies are starting to, or continuing to, contract

– Companies are starting to, or continuing to, contract

– Stock prices should start to, or continue to, decrease in value

– Commodity prices should start to, or continue to, decrease in value

– The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, decrease in value

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  • Shome Moitra

    BDI among and like other global shipping indices is based on Time Charter Equivalent (TCE) – which is the theoretical earning of a vessel (ship) over a period of time while its hired (chartered). Now TCE is market dependent – based on supply and demand of not one but two factors – tonnage (availability of ships) and cargo. Even if the net ton of cargo carried increases over a period of time, the TCE could decrease due to several factors e.g. net availability of same class of ships to carry a particular cargo, socio-economic factors, environmental regulations etc.
    So my 2 cents being in the commercial shipping industry for 12 years says do not blindly co-relate the TCE of ships or BDI (and such indices) with global consumption – yes it is a good “guiding tool” but there is more to the picture that the objective eyes need to see before making a decision.

    • Ping2

      Would you care to venture an opinion as to why the BDI is at 317 (31st Jan 2016), and dropping? Is it an oversupply of ships available, or a drop in tonnage of cargo?

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  • truthbetold

    I anticipate an economic collapse here in the U.S. in early 2015. Europe is pulling away from the dollar. The Baltic Dry Index, BDI, being a key future economic indicator continues to drop. In 1986 the BDI was 11,700. As of 12/24/2014 it was 866. It is coming. Be prepared. Keep only as much money in your checking account to cover your bills. Keep the rest in your possession. Stock up on dry goods, non perishable. It may be several months of hard times when this collapse happens. Good luck.

    • Question

      What if it’s mostly due to previous overinvestments in ships? Is the global shipping capacity a part of the model calculations? If not, this index does not really tell us the shipping “demand”?

    • Ping2

      Hindsight is 20/20, and so I have an advantage. The BDI now sits at an (unthinkable) 317 today 31st January 2016. And still no world collapse. Brent crude is at $40 bbl. WTF.
      I have 2 questions if you care to reply.
      1. How low will it have to go before a collapse is triggered?
      2. What’s propping the whole thing up? (I also predicted crash some time ago.)

      • A.S.

        I predict the Baltic Dry Index will fall to under 200 by end of March and under 100 by end of May. If the decline continues at the rate it was going in during January, then it will be under 200 by end of February and under 100 by end of March and close to 0 by end of April. What will it mean if it will be at 0???

        • Ping2

          Thanks, but you have answered my question with a question.
          Having no experience or knowledge of world trade and shipping (school teacher), I am attempting to bolster my inadequate pension with geared strategic investments, as I don’t have the luxury of waiting years for slow and steady growth. So I study indicators to see if I can time the next Big Bang to a nicety, and invest at the right time.
          Today the BDI is at 297, and my question is “At what point does the BDI indicate a meltdown in world trade, and an imminent collapse of financial markets and banks? And, IS it actually an indicator of such an possibility? (As in 2008.)
          I also found another interesting site which shows the movement of ships at sea. http://www.marinetraffic.com/en/ais/home/centerx:-24/centery:40/zoom:6
          Last week there was NOT ONE SINGLE cargo vessel in the Atlantic ocean between mainland Europe and the US. How does this information correlate with the BDI, and does it add to the value of the BDI as an indicator of trade grinding to a halt?
          If your business training and experience allows you to advise me, I would be grateful to learn from you. Thank you.

          • A.S.

            I am not a financial expert, just a very good listener and researcher. Your link to http://www.marinetraffic.com is excellent and is something that financial advisers that say the Baltic Dry Index is not such a big deal always ignore. It is now down to 293 and falling. I would say we are already in global meltdown. Look at the stock crashes in Europe. The bank failures in Europe. Japan’s major stock crash recently. The wars all over the world. Obama signing the TPP and I bet Congress will ratify it very soon. Good bye more manufacturing what is left. Gold and Silver is not going to help: can you buy food with it? Can you eat it? The only thing that will be worth something is food, water, supplies(fixing, medical aid, cleansers), alternative energy, etc. Stock up on the basics, cheap healthy food. Have a way to store clean filtered water. Get the supplies. Have generators or lots of batteries. And oh, get a gun, rifle, whatever, to protect your family form looted and even the government. I am actually living on very little from pay check to pay check so I can’t afford to buy anything. But pray to God that things will work out and never lose hope.

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  • Dylan Montgomery

    Where are the figures for the LPG shipping found?

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  • Stuurman

    Extremely misleading! The BDI is much correlated to the suply and demand of ship’s tonnage than to the world economy.

    • Stuurman, you are exactly correct. The BDI is directly impacted by the tonnage being shipped around the world. As the tonnage goes up, the BDI typically goes up, and as the tonnage goes down, the BDI typically goes down.

      Here’s what we extrapolate from that. If tonnage is going up, and the BDI is going up, it tells us that global economic activity is picking up, which is a good sign for global financial markets.

      Conversely, If tonnage is going down, and the BDI is going down, it tells us that global economic activity is falling off, which is a bad sign for global financial markets.

      Hope this helps.

      • Troy Yanda

        What tonnage are you measuring? The raw materials (coal, wheat, iron ore….)? Where would I find this information? thanks

  • Abekattenzz

    what is one point equal to? a dollar ?

  • Brian

    Your videos here and on Scottrade are outstanding road maps for me. I really love all the work you guys do.

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