What is the BDI?
The Baltic Dry Index (BDI) is a number that is published by the London-based Baltic Exchange. The Exchange contacts shipping brokers around the world every day. It asks them how much it would cost to book cargoes of various raw materials on over twenty different shipping routes. Brokers respond with a cost after factoring in variables like type and speed of the ship, and the distance to be covered.
The Exchange uses these costs to calculate the BDI and publishes it at 1 PM London time, every single weekday (Monday to Friday).
The goods include only dry cargo like iron ore, grain, coal, and cement. They exclude oil, chemicals, gas, or containers. The size of the bulk carriers (ships) could be Supramax (the smallest), Handysize, Panamax, and Capesize (the largest).
So, the BDI is an estimate of the average price to bulk ship raw materials. And as such, it is a predictor of the shipping cost, which is a significant component of input costs.
What does the Baltic Dry Index value mean?
The BDI is a leading economic indicator. (A leading indicator goes up or down before the economy does.) This is because the index does not look at ships transporting finished goods. It considers only raw cargo, the precursors to production.
A high BDI shows an increase in demand for ships and a shortage in their supply. There is a prospect of inflationary pressure in the supply chain. It takes years to build cargo ships, so their number doesn’t change rapidly. An increase in demand pushes the index higher.
A low BDI indicates that producers have lessened their demand for ships (because there is less demand for finished goods, and thus also for raw materials), causing ship owners to reduce their rates to attract cargo. It is infeasible to take vessels out of circulation during periods of low demand. Storage costs are prohibitive, and the ship deteriorates if left unused.
What determines the BDI?
Supply and demand drive the BDI.
The supply is that of ships, and this number is pretty steady.
Commodity buyers who need the raw material for production determine the demand.
It is not easy to manipulate either the supply or demand. Therefore, by and large, the BDI is free of speculation. Hence, it is a reliable barometer of the volume of international trade.
Can you invest in the BDI?
Changes in the BDI provide an awareness of the demand for ore, grain, and other raw materials. The BDI is a gauge of industrial production and economic activity. Changes in the index can give investors an insight into international supply and demand trends. It can help investors understand and predict market swings. It is an early predictor of an impending economic upturn or downturn.
The Baltic Dry Index is not a security, so you cannot directly invest in it. But you can get exposure to it in a couple of different ways.
The first is by investing in the shares of the bulk shipping companies. These companies profit from the demand for ships when the index is rising.
Another way is by investing directly in commodities. An increasing index means that these are in demand.
So, while an investor cannot invest in the BDI, it is a convenient tool to stay informed about market trends.
The BDI over the years
The Baltic Exchange first published the index in 1985. The index values have ranged from 290 to 11793. It is currently trending at around 2076.
A closer look at some ups and downs in the BDI
This chart shows the BDI for the period September 2017 to January 2022.
The collapse of the Brumadinho dam at the Córrego do Feijã iron ore mine, owned by the Vale company in Brazil, triggered the fall in the index in January 2019. About 40 million tonnes of iron ore went off the market, causing the decline.
The index then rallied to reach a 9-year high of 2518 in September 2019. An increased level of exports – of iron ore from Brazil to China and grain from South America to Asia – drove the rally.
Finally, as the chart shows, the BDI peaked in October 2021, then dropped by over 70%. Analysts attribute this drop to a drop in China’s steel production, and a corresponding decrease in iron ore shipments.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only