- The Baltic Dry Index is published daily. But for most investors who are not steeped in the logistics industry, it is one of those more obscure financial market indicators that only surfaces from time to time – mostly when it makes some dramatic move.
- It measures the average cost to ship dry bulk freight across 20 ocean routes. Its movements may reflect shifts in commodity prices, or arcane shipping technicals, or changing economic fundamentals, or some combination of all of these.
An article in MacroHive reviews the origins of the BDI, its performance over time, its key drivers, its economic significance, and thoughts on how to trade it.
Market Implications
Understanding the nature of the Baltic Dry Index can help investors discern whether and how the freight shipping market is affecting the global economy.
Introduction
The Baltic Dry Index (BDI) is one of those more obscure financial indicators that turns up in the financial press from time to time when freight shipping rates break out of comfortable well-established ranges.
Unfortunately there is often little accompanying analysis to help investors decode what is driving these changes and what they should do to take advantage of them.
This article aims to help investors understand the BDI think through what changes in it might mean and how to capitalize on them.
A Storied History
If “Baltic Dry Index” sounds a bit like something from a bygone era you wouldn’t be too far off. Its distant origins date back to 1744 when businessmen and shippers involved in trade and shipping in the Baltic Sea area started meeting regularly at the Virginia and Baltick Coffeehouse in London to exchange news, trade securities and do shipping deals.
As global commerce grew with the emerging industrial revolution in the 19th century the Baltic became a more formal organization. It set rules for trading and transacting in a wide range of raw materials. It starting compiling pricing information on various commodities and disseminating them in an early version of indices. By the second half of the 19th century it was becoming more international, and its scope expanded to include agricultural commodities.
In 1900 today’s organization took form when the Baltic and the London Shipping Exchange merged to form the Baltic Mercantile & Shipping Exchange Ltd. During the depression years the Baltic Exchange moved away from trading commodities to focus more on shipping and ship chartering, serving as intermediaries between ship owners and merchants around the globe.
In 1985 the Baltic Exchange started compiling the Baltic Freight Index for dry bulk cargo on defined ocean routes. It polled ship brokers daily on the cost to ship cargos and compiled them into an index. In 1999 the BFI evolved into today’s Baltic Dry Index. The Baltic Exchange also developed freight derivatives, in particular the freight forward agreement (FFA) that allows shippers and merchants to hedge and lock in the cost of shipping commodities.
Today the Baltic Exchange is a key player in the global freight shipping market, compiling and disseminating information about the industry and freight derivatives. In addition to dry bulk cargo the Baltic Exchange is also active in a wide range of other types of cargos including tankers, container ships and even air freight.
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Source: MacroHive
