"The Baltic Dry Index is an Accurate   Indicator. When Trending Upwards - Economies Are in Rude Health - When Trending Down, The Opposite is True"

Introduction

Baltic Dry Index

The Baltic Dry Index (BDI) is an economic indicator that is put out daily by the Baltic Exchange.

It is in fact, a composite index comprising of the Capesize, the Panamax, the Supramax  and the Handysize Averages.

Nope, we'd never heard of them either.  And what weird names!

They are regarded as economic bellwether indicators.

Originally started in 1744 in coffee houses in London (very similar origins as the Stock Exchange) and in its present form has been supplying data about freight costs on various routes around the world.

In fact, the four composite indices are an assessment of freight costs for 22 shipping routes.

 Furthermore, freight vessels are getting bigger and bigger and transporting ever heavier loads.

"The Constituent Averages of the
Baltic Dry Index"

The Baltic Dry Index, was, until recently made up of four individual averages - the Capesize Average, the Panamax Average, the Supramax Average, and the Handysize Average. 

On further analysis, the Baltic Exchange decided to drop the smaller Handysize Average, so the BDI now comprises of just three Averages.

Capesize Average

The Capesize Average represents 10% of global shipping but they represent ships that can carry more than 100,000 tons of cargo.  They are so large that they cannot pass through the Panama Canal.

After intensive reaseach, it has recently been found that the Capesize Average now represents 40 per cent of all raw material shippig costs with vessels capable of carrying 180,000 tons.

The Panamax Average represets 19% of global shipping and cater for ships that can carry 60-80 thousand tons. 

The percentage has recently being revised to 30 per cent of the total.

The Supramax Average, sometimes called the Handymax Average, represents 37% of global shipping and caters for ships that can carry 35-59 thousand tons of cargo.

The percentage has recntly being revised to 30 per cent of the total.

The Handysize Average represents 34% of global shipping and caters for ships that can carry 15,000 to 35,000 tons of cargo.

Recently, this average was reckoned to represents less than 10% of the total and has since being removed from future BDI calculations.

The Baltic Dry Index reached the dizzy heights of 11,793 in the May 2008 only to slip to 663 points six months later. Phew! Quite a drop.  But note the year!!  The year of financial crisis.

It recorded its lowest point ever of 290 in 2012 after an over-supply of ships and decreaed orders for iron and coal. 

By 2016 it had recovered to over 1,000 givig the shipping industry massive gains, and some companies recorded gains of 2000% plus in their stock price in just 5 days.

"Nice Facts - But What Exactly Does
The Baltic Dry Index Mean?"

Well, well, well!  Non other than our long lost friend Peter Lynch made one of his stock picking principles to look at economic indicators in the world around him.

No wonder Warren Buffett took a shine to him.

One of his revelations was to mull around crowded shopping malls and observe what people were buying a lot of.  What he was doing was trying to discover his own economic indicator.

The Baltic Dry Index (BDI) is an economic indicator that looks at the global economy, albeit from a different angle.

The BDI is a way of measuring the cost of shipping raw materials, such as steel, iron ore, coal, cement, around the world.

As alluded to in the Introduction above, the Baltic Exchange average out the costs of all the 22 different shipping routes and the result is the Baltic Dry Index.

The BDI therefore is a measure of the global demand for raw materials. Industries buy raw materials if they are manufacturing products.  Industries stop buying raw materials when their inventories are high.

It stands to reason that the demand for raw materials increases if economies are growing. And vice versa.

The Baltic Dry Index is very useful because it is adjusted daily and cannot be manipulated because it is computed by the forces of supply and demand.  Which means that when the index turns up, the demand for raw materials turns up and when the demand for raw materials declines, the Baltic dry Index should also decline.

To sumarise: like with most economic indicators, what we are looking for are "trends."

When the Baltic Dry Index reverses and starts to move up:

• Global economies start to turn upwards
• Companies also turn around and begin an uptrend
• Stock prices will start to rise
• Commodity prices will start to increase
• Commodity currencies, such as the South African Rand, the Australian Dollar, the Canadina Dollar, and the New Zealand Dollar should all start to turn upwwards

Conversely, when the Baltic Dry Index begins to turn down:

• Global economies begin to reverse into a downwatd trend
• Companies start to contract
• Stock prices, generally, beging to reverse
  
• Commodity prices start to decline
• Commodity currencies begin to decrease in value
  

Conclusion

Like all economic indicators, the Baltic Dry Index is ever-changing.  Since its inception in 1744 it has undergone many changes, both in name and constituency.

Now another change looms.  Due to research it was found that the Handysize Average was only contributing around 10% of the whole so that average will no longer be part of the BDI. The new Average will be 40%, 25% and 25% Capesize, Panamax, and Supramax respectively.

It is to be hoped that the new calculations will result in a more accurate indicator.

Many investors regard the Baltic Dry Index as a leading economic indicator. Not least because of its accuracy.  Other leading economic indicators, such as Gross Domestic Product (GDP), Employment figures, Consumer Confidence, can all be revised and tampered with.

Access to the Baltic Dry Index is by subscription or it can be found through Bloomberg and Reuters.

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