The Baltic Dry Index (BDI) measures changes in the cost of transporting various raw materials, such as coal and steel. Created by the London-based Baltic Exchange, it plays a crucial role in understanding global trade dynamics.
Members of the exchange directly contact shipping brokers to assess price levels for specific shipping paths, the type of product transported, and delivery times. The Baltic Dry Index is a composite of four sub-indices that measure different sizes of dry bulk carriers: Capesize, Panamax, Supramax, and Handysize.
Key Takeaways
- The Baltic Dry Index (BDI) is an index reflecting average prices paid to transport dry bulk materials across more than 20 routes.
- The BDI serves as a leading indicator of economic activity as changes in the index signal supply and demand for essential manufacturing materials.
- The high volatility of the index is due to the limited supply of large carriers, which come with long lead times and high production costs.
How the Baltic Dry Index Works
The Baltic Exchange calculates the index by assessing multiple shipping rates across more than 20 routes for each of the BDI component vessels. This geographical and methodological diversity gives the index a robust composite measurement.
Analyzing changes in the Baltic Dry Index can offer key insights into global supply and demand trends. Many interpret a rising or contracting index as a leading indicator of future economic growth, grounded on the demand for raw materials that signal upcoming construction and manufacturing activities. These are pivotal times, as raw materials are essential before any economic recovery or growth phase proceeds.
The Baltic Exchange also specializes in freight derivatives, including financial forward contracts known as forward freight agreements.
The Sizes of BDI Vessels
The BDI assesses shipments across different vessel sizes:
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Capesize: These are the largest ships in the BDI, ranging from 100,000 deadweight tonnage (DWT) or more, with an average size of 156,000 DWT. These are primarily used for transporting coal and iron ore on long-haul routes and are too large to traverse the Panama Canal.
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Panamax: Named for being the largest vessels that can navigate through the Panama Canal, these carry between 60,000 and 80,000 DWT. They typically transport commodities like coal, grains, sugar, and cement, and often require specialized loading and unloading equipment.
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Supramax: Also known as Handymaxes or Handysize ships, these vessels have a capacity of 45,000 to 59,999 DWT. Generally equipped with specialized loading and unloading gear, they are versatile and often used in ports that cannot accommodate Panamax vessels.
Types of Dry Bulk Commodities
Dry bulk commodities are categorized into major and minor bulks. Major bulk commodities include iron ore, coal, and grain, making up nearly two-thirds of global dry bulk trade. Minor bulks consist of steel products, sugars, and cement, covering the rest.
Coal, a top dry bulk commodity, is heavily imported by countries like India, China, and Japan for energy and electricity needs. Grain, another major cargo, holds a significant share in global seaborne dry bulk trade.
Real-World Example
The index tends to fall when other market indicators are stable, as it removes the speculative element present in many trades. Due to the tight supply of large carriers and their high production costs, the index is susceptible to extreme volatility if there’s a sudden shift in global demand.
Historical examples highlight the index’s predictive power. Its sharp decline during the lead-up to the 2008 recession was a prescient warning. Additionally, from September 2019 to January 2020, the Baltic Dry Index plummeted over 70%, warning of the economic downturn fuelled later by the COVID-19 pandemic. Conversely, the BDI surged throughout 2021 as shipping disruptions during the pandemic drove up transportation costs.
Related Terms: Baltic Exchange, Capesize, Panamax, Supramax, Handysize, dry bulk commodities.
References
- Baltic Exchange. “Dry Services”.
- Bulk Carrier Guide. “Various bulk carrier sizes and employment guide”.
- Trading Economics. “Baltic Exchange Dry Index”.
