BALTIK DRY INDEX

INTRODUCTION

The Baltic Dry Index (BDI) is an economic indicator issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

DEFINATION

A shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). The Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) - Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index's composite measurement. It is also known as the "Dry Bulk Index".

HISTORYIn 1744, the Virginia and Maryland coffee house in Threadneedle Street, London, changed its name to Virginia and Baltick, to more accurately describe the business interests of the merchants who gathered there.

Today's Baltic Exchange has its roots in a committee of merchants formed in 1823 to regulate trading and formalize the exchange of securities on the premises, which by then had moved to the Antwerp Tavern.

The first daily freight index was published by the Baltic Exchange in January 1985.

WORKING OF BALTIC DRY INDEX

Every working day, a panel of international shipbrokers submits their view of current freight cost on various routes to the Baltic Exchange.

The routes are meant to be representative, i.e. large enough in volume to matter for the overall market.

These rate assessments are then weighted together to create both the overall BDI and the size specific Supramax, Panamax, and Capesize indices.

WORKING OF BALTIC DRY INDEX

The BDI factors in the four different sizes of oceangoing dry bulk transport vessels:

Ship Classification

Dead Weight Tons

% of World Fleet

% of Dry Bulk Traffic

Capesize 100,000+ 10% 62%

Panamax 60,000-80,000 19% 20%

Supramax 45,000-59,000 37% 18%

Handysize 15,000-35,000 34% 18%

WORKING OF BALTIC DRY INDEX

The BDI contains route assessments based only on time-charter hire rates "USD hire paid per day". Fuel (="Bunkers") is the largest voyage dependent cost and moves with the crude oil price. In periods where bunker costs fluctuate significantly, the BDI will move more than the shipowners' realised earnings.The index can be accessed on a subscription basis directly from the Baltic Exchange as well as from major financial information and news services such as Thomson Reuters and Bloomberg L.P..

WORKING OF BALTIC DRY INDEXChanges in the Baltic Dry Index can give investors insight into global supply and demand trends. This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation.Because the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly. The Baltic Exchange also operates as a maker of markets in freight derivatives, a type of forward contract known as FFAs (forward freight agreements) that are traded over-the-counter.

IMPORTANCE OF BALTIC DRY INDEX

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals, the way you might park a car safely over the winter. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.

IMPORTANCE OF BALTIC DRY INDEX

e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up.

In other words, small fleet changes and logistical matters can crash rates..."The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains.

IMPORTANCE OF BALTIC DRY INDEXBecause dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food; the index is also seen as an efficient economic indicator of future economic growth and production.

The BDI is termed a leading economic indicator because it predicts future economic activity.

Another index, the HARPEX,focuses on containers freight. It provides an insight on the transport of a much wider base of commercial goods than commodities alone.

HARPEX

HARPEX is regarded as a Current-Activity Indicator, because it measures and charts the changes in freight rates for 'container ships.' Container ships typically carry a wide variety of finished goods from a multitude of sellers. These are factory output goods headed for retail markets, at the other end of the supply chain.

IMPORTANCE OF BALTIC DRY INDEXOther leading economic indicators—which serve as the foundation of important political and economic decisions—are often measured to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. "People don't book freighters unless they have cargo to move."

WHY INVESTORS WATCH THE BALTICDRY INDEXThe Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects.

WHY INVESTORS WATCH THE BALTICDRY INDEXTypically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing.

WHY INVESTORS WATCH THE BALTIC DRY INDEXThe Baltic Dry Index is also a compelling indicator because it is a simple, real-time indicator that is difficult to manipulate.

Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players.

The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand.

WHY INVESTORS WATCH THE BALTIC DRY INDEXThe supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply. 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.

SIGNIFICANT LEVELS OF BALTIC DRY INDEXOn 20 May 2008, the index reached its record high level since its introduction in 1985, reaching 11,793 points. Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986; though by 4 February 2009 it had recovered a little lost ground, back to 1,316. These low rates moved dangerously close to the combined operating costs of vessels, fuel, and crews.By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the reduction of letters of credit, historically required to load cargoes for departure at ports. Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards. This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.

SIGNIFICANT LEVELS OF BALTIC DRY INDEXDuring 2009, the index recovered as high as 4661, but then bottomed out at 1043 in February, 2011, after continued deliveries of new ships and flooding in Australia.

Though rebounding to 2000 on 7 October, by 3 February 2012, the index made a new multi-decade low of 647 on a continued glut of dry bulk carriers and decreases in orders of iron and coal.

On 10 February 2016 the Baltic Dry Index reached the historic low of 290.

INTERPRETING BALTIC DRY INDEXThe Baltic Dry Index typically increases in value as demand for commodities and raw goods increases and decreases in value as demand for commodities and raw goods decreases.Here’s what it typically means when the Baltic Dry Index turns around and starts moving UP:

1.Global economies are starting to, or continuing to, grow2.Companies are starting to, or continuing to, grow3.Stock prices should start to, or continue to, increase in value4.Commodity prices should start to, or continue to, increase in value

5.The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, increase in value

INTERPRETING BALTIC DRY INDEXHere’s what it typically means when the Baltic Dry Index turns around and starts moving DOWN:

1.Global economies are starting to, or continuing to, contract2.Companies are starting to, or continuing to, contract3.Stock prices should start to, or continue to, decrease in value4.Commodity prices should start to, or continue to, decrease in value5.The value of commodity currencies—like the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD)—should start to, or continue to, decrease in value