Baltic Exchange Dry Index Flags Global Recovery
International Trade’s Secret Leading Economic Indicator
Apr 15, 2009
The London-based Baltic Exchange Dry Index (BDI) closely monitors shipping costs to deliver raw materials via 26 pre-selected waterway routes. The BDI directly measures the demand for bulk freight ships that carry raw materials such as iron ore, grain and coal.
This demand reflects the amount of raw material cargo traded in specific markets around the world. Therefore the BDI is considered an accurate gauge of international trade. In short, the index provides an accurate assessment of the price of moving major raw materials by sea.
Each working day, brokers from around the globe provide quotes to the Baltic Exchange for the latest charges for shipping raw materials through the monitored seaway routes.
Examples of Baltic Dry Index Components
The daily pricing exercise might include the following raw materials, shipping charges and volumes.
- 100,000 tons of iron ore from Brazil to China
- 1,000,000 tons of wheat from America to Italy
- 100,000 tons of coal from Australia to Japan.
Why Baltic Dry Index Is Important
Broker-based information makes the BDI an objective measure of current prices required to book large cargo shipments. The index is also highly responsive to changes in demand for shipping. That’s because the supply of container ships is relatively fixed, given that new ships require two years to build and the prohibitive expense to take existing vessels out of service. Any reduction in demand results in an immediate downward spike in the BDI, just as a demand increase causes an upward BDI surge.
But what makes the BDI unique is the fact that the index accurately measures demand for raw materials. Demand for raw materials is always a strong indicator of demand for finished products.
Lead Indicator for Great Recession
On October 28, 2008, the BDI slipped to 982 points – its lowest level in 6 years and down 90% from just 10 months earlier. White House economists must have been paying attention to the BDI’s sharp plunge. Just 5 days earlier, George W. Bush had called for an emergency 20-nation summit in Washington to deal with a crisis frighteningly reminiscent of the Great Depression.
Large shippers like Ukraine’s Industrial Carriers declared bankruptcy. Equity markets crashed, with even blue chip stocks in the S&P 500 falling by 25% from their highs of just one month earlier.
Baltic Dry Index Shows Worldwide Improvements
By December 2008, the BDI had continued to fall to 663 points down over 95% on the year. With an increasing number of their cohorts going under, many shippers couldn’t arrange letters of credit traditionally required to load cargoes and depart from ports.
After Barack Obama became president, there was a glimmer of hope. By February 2009, shipments of raw resources had improved to 1,316 points – up about 5% from their depressed levels in late 2008. The index crawled ahead 1.5% to 1,336 as of April 17. (Update: 5 days later, the BDI had improved a further 35% to 1,797.)
Economist Howard Simons has chartered the BDI against prices for S&P 500 stocks and found that the Baltic benchmark is a very good leading indicator for share prices. It seems that as long as the BDI continues its current course of improvement, the global economy and stock markets should trace similar trajectories upwards.
Sources for this Article
This article presents independent calculations and insights based on data provided by Bloomberg and Yahoo! Finance as well as Baltic Dry Index online charts from InvestmentTools.
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