BDI is a “leading economic indicator” in that it is a predictor of the total cost of raw materials delivered to customers who produce manufactured goods and pass costs on to wholesale buyers and then to retail consumers. Because it measures the transportation cost of raw materials used for production of finished goods, and there is no speculative component in the Baltic Dry Index because freighters are contracted only if there is cargo to move, it is an important input in predicting short-term economic activity. In addition, I find it helpful in forecasting short-term commodity price movements and macroeconomic trends.
The comments above and below are excerpts from an article by Mickey Fulp, with Troy McIntyre, (MercenaryGeoligist.com) which has been edited ([ ]) and abridged (…) to provide a fast & easy read.
Baltic Exchange History
The Baltic Exchange has a long history.
- It was founded in 1744 by a group of merchants and traders in a London coffee house and called the “Virginia and Baltick”, reflecting England’s major sources international commerce at the time.
- By 1823, it consisted of a merchant committee that regulated trade and operated a securities exchange from a local tavern.
- It admitted the London Shipping Exchange as a member in 1900 and organized as a private limited company with shareholders.
- In early November of 1992, the Baltic Exchange was acquired by the Singapore Exchange in a friendly transaction. The Exchange consists of over 600 member firms and is the world’s only source of maritime information for the trading and settlement of physical and derivative shipping contracts.
Baltic Dry Index
The Baltic Dry Index was started in 1985 and surveys a panel of international shippers on a daily basis for assessments of rates. It is a weighted index that considers shipping routes and volumes for four different categories of cargo ships [as mentioned below]. BDI covers 100% of bulk dry cargo in transit on the world’s oceans but does not include ships transporting freight via container or transport of energy liquids by tanker.
- The largest bulk cargo ships carry over 100,000 dead weight tonnes and are called “Capesize” because they are too large to enter the Panama or Suez Canals; i.e., they must travel around the southern capes of South America and Africa. These ships, which can reach up to 400,000 tonnes capacity in Southeast Asia, handle 62% of the world’s bulk dry cargo, mostly iron ore and coal. Other sizes of bulk dry cargo ships include:
- Panamax, which carry from 60,000 to 80,000 dead weight tonnes, and handle about 20% of world cargo;
- Supramax from 45,000 to 59,000 tonnes, and
- Handysize from 15,000 to 35,000 tonnes. The latter two carry of 18% of annual world cargo.
BDI is a direct measure of the supply of dry bulk carriers versus demand for shipping capacity. The supply part of the equation, consisting of about 9000 vessels worldwide, is tight and inflexible. Unlike oil tankers, it is costly to park and idle a cargo ship, and new ships take two years to build. Because of fluctuating world and regional demand, the Index can be wildly volatile on both the upside and downside.
The Index indirectly measures global supply and demand for metallic ores, coal, grains, steel, and industrial and agricultural minerals. Because 95% of the metal mined worldwide is iron ore, the Index is dominated by this commodity. Coal (both coking and thermal) is the second most important material contributing to the Index. Copper and bauxite are other metallic ores of consequence; steel, timber, and cement are important construction materials.
BDI is a “leading economic indicator” in that it measures the transportation cost of raw materials used for production of finished goods. Therefore, it is an important input in predicting short-term economic activity.
There is no speculative component in the Baltic Dry Index because freighters are contracted only if there is cargo to move. That said, there is a freight derivatives market operated by the Baltic Exchange and administered by brokers that allows principals and traders to lock-in or hedge freight rates via futures contracts. These derivatives are collectively called “forward freight agreements”.
…The Baltic Dry Index has exhibited extreme volatility over the past 14 years with rises and falls broadly corresponding to bull and bear markets for industrial commodities.
- BDI’s all-time high of 11,793 was reached on May 20, 2008 in the second of two parabolic spikes when commodity prices peaked. By December 5 of that year, it had plunged to a post-1986 low of 663 for a 94% decline as commodities demand crashed amid the global economic crisis.
- From early 2012 to Q3 2016, a deep bear market for commodities resulted in the Index trading well below its previous low. Its all-time bottom of 290 occurred on February 11 of this year due to severely depressed demand for iron ore and coal and a glut of carriers.
- Since that time, BDI has moved sharply upward as the commodities sector enters an incipient bull market cycle. It reached 1257 on November 18 but is currently trading in the mid-900 range as cargo shipping reaches its usual year-end lull. The 25% decline over the past month attests to the Index’s volatility.
Economic Factors That Influence Movements Of the BDI
Economic factors that influence movements of the BDI include:
- Supply, demand, and prices of bulk dry commodities.
- Vessel supply and capacity.
- Crude oil prices and the resulting cost of bunker fuel.
- Seasonality in the transport of commodities.
- Port congestion and choke points including straights, channels, and canals.
- Health of the world’s economy and overall market sentiment.
- Geopolitical events, labor issues, weather, and accidents in exporting and importing countries.
…Based on annual opening and closing values, we define bull market years for the Baltic Dry Index (green) as those in which the price closed the year > 10% higher than it opened; bear market years (red) as those in which the price closed the year >10% lower than it opened; and neutral years (black) as those in which the percentage change was less than 10%:
Year Jan Open Dec
2003 1738 4765 174.2
2004 4761 4639 -2.6
2005 4456 2407 -46.0
2006 2438 4397 80.4
2007 4452 9143 105.4
2008 8891 774 -91.3
2009 773 3005 288.7
2010 3140 1795 -42.8
2011 1693 1738 2.7
2012 1624 699 -57.0
2013 698 2277 226.2
2014 2113 782 -63.0
2015 771 478 -38.0
2016* 473 946 100
*thru December 16, 2016
The Baltic Dry Index has an average range from the beginning to end of a given year of 94% over the past 14 years.
There are also interesting seasonal trends for the Baltic Dry Index:
- The BDI Index generally falls from the beginning of January to early February..
- rallies robustly from early February to early March.
- falls off from mid-March to mid-April regardless of market trend,
- rises in a steady manner from mid-April until late May (bear market years) or early June (bull and overall market years).
- In bear years, the Baltic Dry Index undergoes a steep decline from late May thru mid-June and then steadies during the early summer.
- Beginning in late July it undergoes a steady downtick for the remainder of the year.
- For overall and bull market composites, the BDI is flat and oscillating during the summer months
- then it goes mostly higher from mid-September thru early December, except for a pause in late October to mid-November.
- In all cases, there is a significant drop-off in the Baltic Dry Index during the second and third weeks of December. The BDI is not posted from Christmas thru New Year’s.
Reasons For the Seasonal Trends
Now let’s explore some factors that can account for the well-defined seasonal trends in the Baltic Dry Index:
- The early January to early February fall is attributable to wintertime shuttering of some mine operations and ports and the Chinese New Year when that country shuts down for about two weeks.
- A rally occurs over the next month as economic activity in China resumes.
- The mid-April to early May rise in BDI is likely caused by building of inventories in copper, timber, steel, and cement in anticipation of peak Northern Hemisphere construction season. In addition, bunker fuel is costlier in the spring when crude oil prices generally rise as American refineries ramp up for summer driving season.
- BDI is flat during the summer months while construction activity uses stockpiled materials.
- Rates tend to rise from mid-September to late October when grain harvests are shipped and customers re-stock commodities (especially steel-making materials and thermal coal) in advance of the Northern Hemisphere winter.
- A lull then occurs before rates generally move upward again from mid-November thru early December when China imports more iron ore from Australia and Brazil in advance of their wet seasons.
- Freight rates drop as economic activity winds down in North America and Europe in mid-December.
Why Pay Attention to the Baltic Dry Index?
- Because the BDI is a “leading economic indicator” in that it is a predictor of the total cost of raw materials delivered to customers who produce manufactured goods and pass costs on to wholesale buyers and then to retail consumers.
- Because it measures the transportation cost of raw materials used for production of finished goods.
- Because there is no speculative component in the Baltic Dry Index, as freighters are contracted only if there is cargo to move, so it is an important input in predicting short-term economic activity.
- Because it is helpful in forecasting short-term commodity price movements and macroeconomic trends.
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