Baltic Dry Index

The correlation between the supply of large super bulk cargo ships and the demand to utilize the ships and their trade routes

What is the Baltic Dry Index?

The Baltic Dry Index (BDI) is a measure of the correlation between the supply of large super bulk cargo ships (across three different sizes), and the demand to utilize the ships and their trade routes. It is a composite index that helps to assess freight costs on various routes throughout the globe. The BDI comprises the Capesize, Panamax, and Supramax Timecharter Averages.

 

Baltic Dry Index

 

Shipping routes are a crucial part of the supply chain of global and local manufacturers. They hold significant importance to the broader market in general, as demand for them can help predict future economic activity. The freight shipped along the routes on large cargo ships contains the raw commodities needed to manufacture goods across the globe. Such commodities include, but are not limited to, building metal ore, agricultural commodities (grains), and construction materials.

 

Components of the Baltic Dry Index

 

1. Capesize Index

The Capesize Index Includes the five routes below:

  • China-Brazil
  • China to Japan Transpacific
  • Gibraltar/Hamburg
  • Continent/Mediterranean China to Japan
  • China via Australia or Indonesia

 

2. Panama Index

The Panama Index includes the five routes below:

  • Hong Kong to South Korea round trip
  • Skaw (most northern point of Denmark) – Gibraltar Transatlantic voyage
  • Hong Kong to South Korea Skaw – Gibraltar
  • Dely Spore around the Atlantic (US grains)
  • Hong Kong to South Korea with Taiwan through the Pacific

 

3. Supramax Index

The Supramax Index includes the ten routes below:

  • Med or Bl Sea to China-South Korea
  • US Gulf to China-South Japan
  • North China to Australia or Pacific round trip
  • North China to West Africa
  • US Gulf to Skaw-Passero
  • Skaw-Passero to US Gulf
  • West Africa to China via South America (east coast)
  • South China via Indonesia to India (east coast)
  • West Africa to Skaw-Passero via South America (east coast)
  • Indonesia to south China

 

Importance of the Baltic Dry Index

Whether you’re an institutional investor, a day trader working from home, or someone looking to invest their savings for the long term, the BDI can help you better understand and predict market trends. For example, if you see the BDI drop uncharacteristically, it can be an early warning sign that we may see an upcoming, or are in the middle of, an economic downturn.

This is crucial for investors when they are timing their trades or attempting to ascertain their risk tolerance and long-term liquidity position. The BDI is another tool in the savvy investor’s tool belt that can help you stay informed and ahead of any market downturns (or perhaps create a short position to capitalize on the scenario).

If you are a retailer or supply chain manager, understanding the BDI and its trends can help you make more informed decisions with regards to purchasing the raw materials needed to manufacture goods or the overall final cost of a product. It is likely that if shipping costs climb, then the overall wholesale cost of a completed item will go up, and a retailer will consequently need to raise prices in order to secure their margins.

If you are a supply chain manager attempting to procure raw materials for your company, understanding the BDI can help you make more informed decisions on whether or not to write contracts where you purchase raw commodities from a long or short position in order to secure competitive pricing.

 

Going Forward with the BDI

Shipping lanes and the transportation of raw materials throughout the globe are a pivotal part of the global economy. Raw materials and the end products they create are often not found and assembled in the same location. The shipment of such goods at competitive prices helps create consumer pricing that helps companies ensure adequate market penetration.

Our understanding of the Baltic Dry Index helps us to understand the macroeconomic ebbs and flows, as well as make more informed investment decisions over the short and long terms.  The BDI is a critical component when attempting to understand global markets and investment trends around the world.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • FOB
  • Freight Expense
  • Purchase Order
  • Trade Credit

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!