Global Outlook

Baltic Dry Index (BDI)

Contributed by eResearch

There is considerable controversy regarding the usefulness of the BDI as a leading economic indicator. Proponents argue that it is a positive forward-looking means of indicating the demand for and use of raw materials. Detractors point out that it has frequently given misleading signals, particularly since the 2008-2009 recession, and that changes in the global shipping business have made the BDI irrelevant.

The Baltic Dry Index measures the amount of cargo circum-navigating the globe and, thus, is generally considered to be a good indicator of the amount of global trade being conducted. It tracks the cost of shipping raw materials around the world in ships of various sizes (see below) and, as such, it has become an important indicator of global production and trade. Key commodities that are shipped include iron ore, coal, and grains, i.e., dry goods, as well as bauxite, cement, fertilizers, and steel products. Finished goods are not included in the calculations.

As shown in the following table, there are four sizes of ocean-going dry bulk transport vessels:

The buyers and sellers determine the prices to be paid for the underlying contracts, then the London-based Baltic Exchange incorporates 23 different sea-routes throughout the world for the various materials and subsequently averages all of them into one index.

We show the chart (courtesy of Wikipedia) for the BDI since it began in 1985. The relative stability of 1985 until 2002 then turned fairly volatile with rapid spikes followed by sharp declines. The plunge in 2008 saw an equally sharp rally, but the last three years have been weak. This chart ends about May, 2012. Note the double bottom at the end of 2008 and 2011 around 650. As shown in the one-year chart that follows, this level is now being re-tested.

Contrast the BDI with the S&P 500 Index. After following fairly closely from 2002 until mid-2010, the indexes then became almost mirror opposites.

Over the past two years, the BDI has performed poorly primarily because supply of vessels greatly exceeded demand. Couple this with declining orders for iron ore and coal, and the BDI hit a multi-decade low of 647 in early February 2012. Contrast this with its all-time high of 11,793 in May 2008. That is a 94.5% drop. Until demand-supply (demand for shipping capacity versus the supply of dry bulk vessels) gets back into a semblance of balance, the BDI is likely to remain depressed, and equally unlikely to be useful for forecasting economic revival.