Baltic Exchange Dry Index (BDI)

by JASON | 8:22 PM in |

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. 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."

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.

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. In the past 6 months, the index has lost 85% of its value as demand for shipping is plummeting. 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.

Baltic Dry isn't a Latvian deodorant or an Estonian cocktail. Rather, it's a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

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—150,000 tons of iron ore going from Australia to China or 150,000 tons of coal from South Africa to Taiwan. Brokers are also asked to consider variables such as the type and speed of the ship and the length of the voyage.

The answers are melded into the BDI, which appears in shipping publications such as Lloyd's List and on the screens of information vendors such as Reuters and Bloomberg. Because it provides "an assessment of the price of moving the major raw materials by sea," as the Baltic puts it, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade.

The BDI is a good leading indicator for economic growth and production. After all, it doesn't deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at People don't book freighters unless they have cargo to move.

Because 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—marginal increases in demand can push the index higher quickly. And significant increases in demand can push the index sharply higher.

Current status...

1/21/09 The level of idle container ships has risen to 255 -- 5.5% of the global fleet, a historic high.

On 20 May 2008 the index reached its record high level since its introduction in 1985, reaching 11,793 points. Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986.[8], though by 4 February 2009 it had recovered a little lost ground, back to 1,316.[9] These low rates move dangerously close to the combined operating costs of vessels, fuel, and crews.[10][11]

By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the reduction of letters of credit, historically required to load cargoes for departure at ports. Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards.[12][13] This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.

Today's level...

The downside of a credit bubble - deflation: the collapse of market demand. What this means for you...

AS THAILAND'S simmering internal conflicts show no sign of abating, threatening the political stability needed to get the country's economic engine cranking, world trade is falling like a house of cards. The worldwide financial crisis that transmitted to the real economy has now transmitted to global trade. And the picture is dreadful.

The Baltic Dry Index (BDI) is a daily average of prices for shipping major raw materials issued by the London-based Baltic Exchange, which traces its origins back to 1744. Since its inception in 1985, BDI measures international shipping rates for dry bulk goods such as iron ore, coal, grains, cement, sand, gravel, fertiliser, copper, etc. On May 20, 2008 the index reached its record high of 11,793 points, the highest since its inception. On December 5, 2008 the index plummeted to 663, the lowest since 1986. The fall represented a 94 per cent crash.

There are reasons for the world to take note of this relatively obscure economic indicator. First of all, while most indicators on which the market relies to forecast the future base their research on information that is weeks and months old, the BDI is current. Each day the Baltic Dry Exchange tracks hundreds of brokers around the world for price quotes on transporting goods, and aggregates them to form the BDI. The index therefore is a real-time reflection of the relations between supply and demand.

Second, since the BDI tracks the cost of shipping raw materials (as opposed to intermediate or finished goods) which are the precursors of economic output, it provides a rather precise measurement of the volume of global trade at the earliest possible stage. And since global economic activity at the end of the day influences the equity markets, movements in the BDI often predict or precede similar moves in the equity markets. The BDI started dropping drastically in early June 2008, before the global equity markets went into a tailspin.

Third, unlike most economic indexes, the BDI is completely devoid of speculative elements. No one will book an ocean freighter on a hunch. There is no room for manipulative or "massaged" data. The price is the price.

On January 21 the number of idle container-ships rose to a historic high of 225, or 5.5 per cent of the global fleet. On January 13 shipping rates hit the big zero as trade sank. Freight rates for containers shipped from Asia to Europe fell to zero - the first time since tracking began over two decades ago. The fall underscores the dramatic collapse in world trade, which represents a significant window of opportunity for the recovery of world economies. The dire prospects in the banking sector around the world means a scarcity of credit, which means a reduction in the availability of letters of credit required to load cargoes. This, in combination with the high debt load for future ship construction and the collapsing prices of raw commodities, is the making of a perfect storm for world commerce.

If past is prologue, we all have reason to feel dread. The Great Depression in the US in the 1930s led to the New Deal, which saw a huge injection of government funding into the economy along Keynesian lines. It also witnessed a rise in protectionism. President Roosevelt, to an extent, was able to stabilise the financial sector with the federal spending programmes, but the New Deal also necessitated higher tariffs to protect the US economy. Ultimately, Roosevelt was not able to resuscitate world trade until World War II. Economic dissatisfaction tends to breed war.

(From Edmund Conway of the UK's Telegraph)“Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October." The BDI (Baltic Dry Index) has plunged 96%, and while it is a very volatile indicator of shipping trends, the latest phase of the shipping crisis is different. The malaise has spread to core trade of finished industrial goods, the lifeblood of the world economy. Shipping journal Lloyd’s List is reporting that in Singapore are now waiving fees for containers traveling from South China, charging only for the minimal ‘bunker’ costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Bloomberg is quoting Frontline Ltd, the world’s biggest owner of supertankers, as saying that about 80 million barrels of crude oil are being stored in tankers, the most in 20 years, as traders seek to take advantage of higher prices later in the year. (hat tip to Investment Postcards from Cape Town)

"If cargo trade stops, a whole lot of supply chain disruption starts....

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall."

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

There’s been some low-bandwidth chatter lately about the plunge in the Baltic Dry index, which is intended to track the price of shipping dry cargo along key routes. In the sort of “oh . . . wow . . . ” manner passing drivers remark on multiple collisions on the highway, it’s been noted that the BDI is down. A lot. While the BDI has been dropping for months, now, the real collapse took place from the week after the Lehman bankruptcy. From a level of 4,949 then, the BDI had, by last week, come down to 1,149, for a decline over about a month of 76 per cent. This doesn’t represent some piece of high-concept securitised paper meeting its Maker in front of a judge; this is the real world of physical assets being employed to do actual work. I had followed shipping in past years, but had never seen a rate of change like that one. So I called friends of mine around that world to get a little closer to the car wreck.

I had wondered if the BDI was truly representative of real-world values, or if it was oversold in the way some credit default swap indices might be. Nope. Ships really are that cheap. As one broker told me: “I just chartered a Handymax to go to the US Gulf from India for $1,000 a day. So the BDI really is pretty accurate.” A Handymax vessel would typically displace about 40,000 deadweight tonnes. You would notice it if it dropped anchor near your dock. The cash operating costs are at least $1,500 to $2,000 per day. On top of that, figure another couple of thousand dollars a day for the capital costs.

Now to put that in presidential election language, what does that mean for hardworking, middle class, average, families who are sitting around the kitchen table playing by the rules? Why should they care that some Greek or Lebanese is underwater, so to speak, on his ship?

How about because what you need to stay middle class and average, or hardworking, is being carried on those ships? Those low charter rates indicate that not much is being shipped, apart from cargoes going from one corporate subsidiary to another, or from one highly creditworthy entity to another.

It all goes back to that Lehman bankruptcy. Among the more serious casualties of that colossal failure of leadership was the letter of credit business. There is nothing more vanilla than the l/c for an international shipment. One bank tells another bank that it will accept the credit risk of an individual importer or exporter. They document that, with forms that have been around forever, then clerks and computers shuffle the paper around. A fee is charged, and goods are released for shipping, inspection, and delivery. The most boring business in the world. Until it stops.

As for freight rates, they will have to recover to the point where the owners can cover their operating costs. That could take a few months longer than you would think, because the cost of mothballing a ship for that period could be higher than keeping it going at today’s rates.

As one ship broker told me: “Values are down by half within the past six months, but nothing is actually being sold right now. The problem isn’t with a single trade route. It’s global.”