Baltic Dry Index (BDI) Definition

What is the Baltic Dry Index (BDI)?

The Baltic Dry Index (BDI) is a maritime and commercial index created by the London-based company. Baltic Stock Exchange. It measures the evolution of the cost of transporting various raw materialslike coal and steel.

Exchange members contact ship brokers directly to assess price levels for given shipping routes, product to be transported and delivery time or speed. The Baltic Dry Index is a composite of four sub-indices that measure different sizes of dry bulk carriers or merchant vessels: Capesize, Panamax, Supramax and Handysize.

Key points to remember

  • The Baltic Dry Index (BDI) is an index of the average prices paid for transporting dry bulk materials on over 20 routes.
  • The BDI is often considered a leading indicator of economic activity, as changes in the index reflect supply and demand for important materials used in manufacturing.
  • The index may experience high levels of volatility as supply from major carriers tends to be low with long lead times and high production costs.

How the Baltic Dry Index works

The Baltic Exchange calculates the index by evaluating multiple shipping rates on more than 20 routes for each of the vessels that make up BDI. Analyzing multiple geographic shipping lanes for each index lends depth to the index’s composite measure. Contact members dry bulk shippers around the world to collect their prices and then calculate an average. The Baltic Exchange issues BDI daily.

A change in the Baltic Dry Index can give investors insight into global supply and demand trends. Many consider a rising or falling index to be a leading indicator of future economic growth. It is based on raw materials because the demand for them portends the future. These materials are purchased to construct and maintain buildings and infrastructure, not at times when buyers have a surplus of materials or are no longer constructing buildings or manufacturing products.

The Baltic Exchange also operates as a market maker in freight derivativesincluding types of financial futures contracts known as freight forward contracts.

BDI vessel sizes

The BDI measures shipments on different sizes of freighters. Capesize boats are the largest vessels in the BDI with 100,000 deadweight tonnage (DWT) or more. The average size of a Capesize vessel is 156,000 DWT.

This category may also include some massive ships with a capacity of 400,000 DWT. Capesize ships mainly transport coal and iron ore on long-haul routes and are sometimes used to transport grain. They are too big to cross the Panama Canal.

Panamax vessels have a capacity of 60,000 to 80,000 DWT, and they are mainly used to transport coal, grain and minor bulk products such as sugar and cement. Panamax cargo ships require specialized equipment for loading and unloading. They can barely squeeze through the Panama Canal.

The smallest ships included in the BDI are the Supramax, also called Handymax (or Handysize). These vessels have a carrying capacity of 45,000 to 59,999 DWT. Although similar in size to Panamaxes, Supramaxes normally have specialized equipment for loading and unloading, and they are used in ports where Panamaxes cannot.

Type of Dry Bulk Goods

Dry bulk goods are generally divided into two categories: large volumes and minor volumes. Some prime examples of dry bulk commodities include iron ore, coal, and grain. These large bulks represent nearly two-thirds of the world’s dry bulk trade. Minor bulks include steel products, sugars, cement and cover the remaining third of the world’s dry bulk trade.

Coal, along with iron ore, is one of the most traded dry bulk commodities by volume in the world. The countries most involved in importing coal for their primary energy and electricity needs are India, China and Japan. Grain is another important cargo in terms of maritime dry bulk trade and accounts for a significant share of the total dry bulk trade in the world.

Concrete example

The index can fall when the goods being shipped are pre-production commodities, which is usually an area where speculation levels are minimal. The index may experience high levels of volatility if global demand suddenly increases or decreases because supply from major carriers tends to be low with long lead times and high production costs.

Stock prices rise when the global market is healthy and growing, and they tend to fall when it stalls or declines. The index is reasonably consistent as it depends on black and white factors of supply and demand without too many influences such as unemployment and inflation.

The BDI predicted the 2008 recession to some extent when prices fell sharply. In a striking example of the insight that can come from the index, analysts could observe that between September 2019 and January 2020, the Baltic Dry Index (BDI) fell by more than 70%, a strong indication of the economic contraction. This happened just before the outbreak of the COVID-19 pandemic. Then, in 2021, the BDI increased dramatically as the pandemic caused rumblings and delays in global shipments.


BDI.

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