Baltic index climbs for third straight session on firm rates for larger vessels

Baltic index climbs for third straight session on firm rates for larger vessels

20 februarie 2020
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Investors and the financial press pay far more attention to the BDI than to other freight indices. Apart from having been around longer, it is far more dynamic and exciting than its tanker cousins and makes for more dramatic headlines. Unfortunately, these stories rarely provide a more detailed analysis of whether the BDI is being driven by commodity market dynamics or shipping market technicals.

More generally, investors can monitor the BDI for a leading indicator of whether a recession or economic boom is coming, although these signals can be obscured by shipping technicals. The index can fall when the goods shipped are raw, pre-production material, which is typically an area with minimal levels of speculation. The index can experience high levels of volatility if global demand increases or suddenly drops off because the supply of large carriers tends to be small with long lead times and high production costs. The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange.

The Baltic exchange publishes a variety of spot freight rates, which are the basis for settling these contracts monthly. It is impossible to trade the Baltic Dry Index directly because it is not an investible index. During more extended slowdowns, shipowners may remove ships from service or scrap older and more inefficient ships. Dry bulk ships account for about 22% of the global merchant fleet (Chart 1).

  1. This category can also include some massive vessels with capacities of 400,000 DWT.
  2. Bulk cargo is distinct from general cargo, which refers to cargo shipped in some packaged form, whether in sacks or palettes or some other organized or grouped manner.
  3. The Baltic Exchange also operates as a maker of markets in freight derivatives, including types of financial forward contracts known as forward freight agreements.

The BDI was established in 1985 and its all-time high was 11,793 in May 2008. In 2020 it hit an all-time low of 299 due to the impacts of COVID-19 on global trade. Its history and inner workingsThe Baltic Dry Index traces its roots back a couple hundred years to when merchants gathered in London establishments to regulate trade and formalize the exchange of securities. However, the current index dates back to 1985, when the first daily freight index was published by the Baltic Exchange in London. Its name is derived from that exchange as it’s not limited to Baltic trade routes.

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While the initial effect of the pandemic was a decline in shipping rates because of a drop in demand, by the second half of 2021, the BDI surged. This was the outcome of declining shipping capacity, coinjar review pushing shipping rates higher. Today the Baltic Exchange is a key player in the global freight shipping market, compiling and disseminating information about the industry and freight derivatives.

The BDI Is About Dry Bulk Shipping Rates, not Commodity Prices

Iron ore futures prices rebounded, aided by renewed hope of further stimulus from top consumer China following a speech from a state planning official. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Various futures exchanges also offer freight futures contracts, including the European Energy Exchange and the Singapore Exchange.

Investors are always looking for practical economic indicators they can use to help them make informed investing decisions. The Baltic Dry Index (BDI) is a practical economic indicator on a global scale. The most direct instrument is forward freight agreements, which cover various shipping routes. The BDI predicted the 2008 recession in some measure when prices experienced a sharp drop.

This category can also include some massive vessels with capacities of 400,000 DWT. Capesize ships primarily transport coal and iron ore on long-haul routes and are occasionally used to transport grains. Average daily earnings for capesize vessels, which typically transports 150,000-ton cargoes such as iron ore and coal, increased by $990 to $15,365.

Intuitively, you might expect a close relationship between commodity prices and the BDI. After all, when demand for some raw materials rises, there will usually be a higher demand for shipping bulk commodities. There is academic work that suggests that commodity prices do help drive the BDI, at least in the short run. The primary bulk commodities are iron ore, coal, grains, bauxite/alumina, and phosphate rock.

What Is the BDI, and How Does It Impact Markets?

The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn’t actually going to use it. Dry shipping is the transportation of dry cargo by ship in an enclosed container. Dry cargo includes commodities such as metal ores, coal and grains but excludes oil, gas, chemicals, etc.

While the Baltic Dry Index is a well-known leading economic indicator, it can sometimes be misleading.

The shipping quotes are combined into the overall index with a 40% weighting for Capesize, and 30% each for Panamex and Supramax. These weights are based on the volume of cargo (in dwt) shipped on each type. We won’t just tell you what to buy – we give you a buy range, price target, a stop loss level in order to maximise total returns and (of course) we tell you when to sell. And we will only recommend very high conviction stocks where substantial due diligence has been conducted.

That means investors need to do more digging to figure out what it means and how to position themselves accordingly. The overall index, which factors in rates for capesize, panamax and supramax shipping vessels, gained 49 points, or 3.8%, to 1,357. The Baltic Dry Index (BDI) is one of those more obscure financial indicators that turn up in the financial press 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 how to capitalize on them. This article aims to help investors understand the BDI, think through what changes in it might mean, and learn how to take advantage of them. Stock prices increase when the global market is healthy and growing, and they tend to decrease when it’s stalled or dropping.

Industry-specific and extensively researched technical data (partially from exclusive partnerships). It is a large bulk carrier that usually has five cargo holds and deck cranes. A Panamax ship is a vessel that is designed to travel through the Panama Canal.

Understanding the Baltic Dry Index

The above graph underlines that the BDI has been very volatile in recent years, particularly between 2005 and 2009, when it behaved as a bubble. The main driver of this surge was linked to commodity prices, particularly oil. The index then plummeted to historical levels and remained weak despite a recovery in global trade. A factor is that many ships were ordered during the “bubble years” and have entered the market, providing capacity growth above demand growth. In recent years the BDI has remained low, underlining a situation of excess capacity in the shipping industry.

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