Gauging Forward Economic Performance – The Baltic Dry Index (BDI)
As part of my ongoing look at commodity demand, I wanted to take a look at the Baltic Dry index. The information in this post is from Bloomberg, The Baltic Exchange, InvestmentTools.com, and an article from Slate.com from 2003, and contains some direct but un-marked quotes along with my edits and original content. Links are at the end of the article.
The Baltic Dry Index ("BDI") is an index that measures the price of moving major raw materials by sea. Because the BDI deals with container ships carrying the precursors to production (building materials, cement, grain, coal, and iron), the BDI is a good leading indicator for economic growth and production. The BDI has a further advantage over stock and bond indices as indicators because the BDI has no speculative content: people only book freighters if they have cargo to move.
So, with this introduction, let's take a look at recent BDI movement. Looking at the data back through 1995, we can see that we are currently experiencing a sharp decline, an indicator that we may be in for some global economic weakness.
However, the chart above is only through June 30, 2005. Let's look at a shorter time period (2004 through July 15, 2005) to see if anything has changed this month:
Nope. So, I will continue to monitor this index to see if anything changes, a move either way. As of now, it doesn't look like a positive sign.
Compiling the BDI (Source: Slate.com)
The Baltic Dry Index is 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.
Baltic
Exchange members (a variety of shipping companies and financial intermediaries) are at the heart of world trade, arranging for the
ocean transportation of industrial bulk commodities from producer to
end user. The bulk freight market relies on the co-operation of
shipbrokers, shipowners and charterers to ensure the free flow of trade.
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.
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—marginal increases in
demand can push the index higher quickly. And significant increases in
demand can push the index sharply higher.
Some Facts About Global Shipping (Source: Baltic Exchange)
Seaborne trade is a vital in enabling the global economy to function. The world relies on a fleet of ships with a cargo carrying capacity of 762 million deadweight tonnes to carry every conceivable type of product. More than 5.9 billion tons of trade was transported by sea in 2002.
2002 Global Trade (United Nations Data)
Shipping Growth Statistics
- The volume of global seaborne trade is now 50% higher than in 1990
- World oil demand has increased at an annual average rate of 1.75% per year since 1970
- The cargo carrying capacity of the dry bulk fleet is 317 million dry weight tons
- A record 514 million tons of iron ore was transported by sea in 2003
- The volume of the container trade has increased seven fold since 1980
Why do freight rates fluctuate?
- Fleet supply: How many different types of ships are available? How many vessels are being delivered and how many are being scrapped?
- Commodity demand: What are the levels of industrial production? Has the grain harvest been successful? Are the power stations importing more coal? How is the steel industry performing?
- Seasonal pressures: The weather has a big impact on the shipping markets from the size of harvests to ice in ports and river levels
- Bunker prices: With bunker fuel accounting for between one quarter and one third of the cost of running a vessel, oil price movements directly affect shipowners
- Choke points: This factor can particularly affect tankers with almost half of the world’s oil passing through a handful of relatively narrow shipping lanes. These points include the straits of Hormuz and Malacca, the Suez and Panama canals, the Bosporus and other important channels whose closure – either from conflict, terrorist attack or a collision in the overcrowded shipping lanes - would change the entire world’s supply patterns
- Market sentiment: Because perhaps as little as half of the demand side is known in a timely fashion, market opinion affects the freight market just as much as the actual supply and demand of ships and cargoes
Sources
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