Definition
The Baltic Dry Index, is issued daily by the London-based Baltic Exchange. The BDI is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.
Baltic Dry Index
The Baltic Dry Index or the BDI is a shipping and trade index which is created and used by the Baltic Exchange, and which allows them to measure the cost changes that may be made while shipping raw material like fossil fuels, metals, grains etc.
Breaking down the Baltic Dry Index:
The London based Baltic Exchange came up with the BDI which is actually a composite of three other sub-indexes that are used for measuring the goods that are carried by dry bulk carriers like Capesize, Panamax and Supramax. The evaluation of multiple geographic routes is done to lend more depth to the composite measurement of the index.
Why is it important?
The BDI holds great importance in the trading world because it helps the concerned people understand the exact capacity of a cargo ship and how readily these cargo ships are available. Cargo ships are specifically designed to carry a specific amount of load and it takes anywhere between two years to build one cargo ship. Not to mention the amount of money that goes in into building a dry bulk carrier (another name for cargo ship). So, if you do not know the Baltic Dry Index, you will never be able to exactly know just how many cargo ships should you be investing in and what should be their capacity.
What can cause changes in the Baltic Dry Index?
This Baltic Dry Index can change very quickly. If there is even a slight increase in the demand of cargo ships the index will also increase. On the contrary, even a slight decrease in the demand of these ships can cause the index to rapidly fall down. For example, if you have 80 ships carrying 79 cargoes the rates will go down; but if you have 79 ships carrying 8 cargoes, the index will rise.
So basically, any small changes either in the fleet of the ships or the logistics can either crash the rates or take them higher. Since, BDI is used to calculate what it would cost to transport raw material via sea, several financial and economical experts also consider this index to be a good representative of the economic standing of a country.
Further Reading
- The Baltic Dry Index as a predictor of global stock returns, commodity returns, and global economic activity – papers.ssrn.com [PDF]
- An approach for Baltic Dry Index analysis based on empirical mode decomposition – www.tandfonline.com [PDF]
- Trade, income and the baltic dry index – www.sciencedirect.com [PDF]
- Shipping markets and freight rates: an analysis of the Baltic Dry Index – jai.pm-research.com [PDF]
- New evidence on the information and predictive content of the Baltic Dry Index – www.mdpi.com [PDF]
- Baltic Dry Index as a major economic policy indicator: the relationship with economic growth – www.sciencedirect.com [PDF]
- Volatility of Baltic Dry Index using GARCH type models with different distributions [J] – en.cnki.com.cn [PDF]
- Empirical analysis on long memory property of Baltic dry index – en.cnki.com.cn [PDF]
- Baltic Dry Index and iron ore spot market: dynamics and interactions – www.tandfonline.com [PDF]
