Source: Bloomberg; BDIY:IND. Value as of first business day
of the month.The Baltic Dry Index, 1985-2015The Baltic Dry Index (BDI) is an assessment of the average
price to ship raw materials (such as coal, iron ore, cement and grains)
on a number of shipping routes (about 50) and by ship size. It is thus an indicator
of the cost paid to ship raw materials on global markets and an important
component of input costs. As such, the index is considered as a leading
indicator (forward looking) of economic activity since it involves events
taking place at the earlier stages of global commodity chains. A high
BDI index is an indication of a tight shipping supply due to high
demand and is likely
to create inflationary pressures along the supply chain. A sudden and
sharp decline of the BDI is likely to foretell a recession since producers
have substantially curtailed their demand leaving shippers to substantially
reduce their rates in an attempt to attract cargo. Like all market indexes, the BDI is constantly changing,
reflecting its price discovery mechanism. The major factors impacting
the BDI are:
Commodity Demand. This is mainly a volume impact which
could be irrespective of commodity prices. An increase in the demand,
particularly if sudden, will likely result in a surge in shipping
rates since additional capacity takes time to be brought online
(either as new ships or reassignment of existing ones). If expectations
about future demand change and that producers reduce their raw materials
demand accordingly, then the BDI will drop.
Ship Supply. Represents the availability of ships in
terms of their capacity and their function. Many bulk carriers,
such as tankers, cannot be readily converted to other uses so the
bulk market is quite segmented and fairly inflexible. The average
ship age can also play since the useful life of a ship is about
25 years. If the average age becomes too high, there are expectations
that significant capacity may be reduced and that this would imply
a rise of the BDI. Inversely, the addition of new capacity
in terms of ship orders may trigger a decline of the BDI, particularly
if demand is not expected to change significantly in light of
this new supply.
Seasonality. The demand for raw materials, such as grain
and coal, has a significant seasonality which will create fluctuations
in the BDI when the transport of these commodities is in high or
low demand.
Bunker Oil Prices. Bunker fuel accounts for about 40%
of vessel operating costs with limited opportunities to mitigate
them. Thus, a surge in oil prices is directly reflected in shipping
rates. The opposite also holds as if energy prices drop, the BDI
can also drop accordingly.
Port Congestion and Canal Capacity. Some ports, particularly
in the context of seasonality, can become congested and can tie
up ships for longer periods than usual. This results in higher shipping
rates as port supply is reconciled with shipping demand. Additionally,
the Panama and the Suez canals, important bottlenecks in global
freight circulation, have a fixed capacity and can impose additional
delays.
Geopolitics. Depending on the geopolitical context, there
may be a level of risk at calling some locations, which is reflected
in insurance rates and consequently in shipping rates. Some chokepoints,
such as the straits of Hormuz, Aden and Malacca may involve the
risks of political instability, as well as piracy, and capacity
constraints to maritime circulation.
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 back to
historical levels and has remained weak in spite of 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 remains low,
underlining a situation of excess capacity in the shipping
industry.
