Wednesday, February 04, 2009

Baltic Dry Index: A Leading Economic Indicator

"People don't book freighters unless they have cargo to move."

What is the Baltic Dry Index and why do economists and stock markets follow it?

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.

The supply of cargo ships is generally both tight and inelastic β€” it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the California desert. So marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. So the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains.

Because 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.

Because it provides "an assessment of the price of moving the major raw materials by sea," according to The Baltic, "... it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."

Other leading economic indicators β€” which serve as the foundation of important political and economic decisions - are often massaged 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."

MP: As the chart above shows, the Baltic Dry Index has almost doubled since its bottom in early December, and is at the highest level October 21, 2008.


15 Comments:

At 2/04/2009 11:13 PM, Blogger bobble said...

LOL, that's priceless. here's a slightly different view of the index

baltic dry index

by the way, how come you weren't drawing our attention to this 'leading indicator' last summer?

 
At 2/04/2009 11:56 PM, Blogger lineup32 said...

warehouse space at sea, tankers full of auto parts,auto's and oil

 
At 2/05/2009 12:01 AM, Anonymous Anonymous said...

bobble: And why arent you using the 5 year chart rather than the 6 month chart? And, are you claiming that the period of the commodities bubble was a "normal" time for the BDI? It is you, sir, who play a little loose with the facts here.

BTW, go back and update your own feeble blog before criticizing those of others.

 
At 2/05/2009 12:33 AM, Blogger Gherald L said...

I'm no economist, but I can compare charts. True, the high from the 1 year chart exaggerates the severity of the situation we're in, but looking at the average before the tall peaks on the 5 year chart (i.e. near where things start out on the 3-year) it shows a starkly different picture from the limited view of Prof. Perry's chart here.

This strikes me as an egregiously misleading post.

 
At 2/05/2009 1:42 AM, Anonymous jimgr said...

BDI still is very ugly.

Rates for a cape were about $180.000 a day and plumbed to 6k in 4 months. Unbelievable contraction.

 
At 2/05/2009 7:18 AM, Anonymous george said...

Aren't Shipowners laying up ships reducing the supply of cargo capacity?

 
At 2/05/2009 8:39 AM, Blogger Finance said...

Again:

Didn't you mention this like two weeks ago. Got another one for you, look at gold prices for the past 12 months -- they're kind of stable with a downward trend... http://66.38.218.33/charts/popup/au0365nyb.html.

As Disraeli once said: Lies, damn lies and statistics

 
At 2/05/2009 9:32 AM, Anonymous jimGR said...

"Aren't Shipowners laying up ships reducing the supply of cargo capacity?"

There was a bottleneck even there, in ship scrapping... Catastrophe, big catastrophe!:) It's fun how bad can things get!

Of course that applies to your current president too!:P

 
At 2/05/2009 10:43 AM, Blogger JimJinNJ said...

the chart is a bit deceiving in a short term view.
here's another
http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

right direction, quite a way to go.

 
At 2/05/2009 12:48 PM, Anonymous Cromagnum said...

I take issue with the article

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."

1) Anything can be gamed or speculated.

2) What drove the price (not cost) of shipping was China's 2002-2008 Nation Building Boom. Contracts on all shipping went through the roof. People grabbed any kind of shipping they could, and some people did buy and resell shipping contracts. (I call that speculation) Note that mid2008 was the fall of prices back to normal, when China ended its major push. Evidence: The peak and fall came before the recession was announced.

As Proff Perry points out, now in 2009, prices are rising again, relatively slowly. Good Times.

The bottom of the market. assuming that the chart data is correct, shows the re-connection of supply with a decreased demand curve.

The hidden wrinkle is how much more shipping capacity is currently under construction with a 2 year build schedule due to #2) above? That will increase the supply curve, and Baltic will adjust again.

 
At 2/06/2009 4:12 PM, Anonymous Anonymous said...

Lets monitor this. 3 things:
1) it is improving
2) it is still very low, around the level of mid october 08 just in the midde of the crisis
3) it has increased another 15% between the graph shown by prof Perry and the following day on the 5th of February.

 
At 2/09/2009 4:57 AM, Anonymous Anonymous said...

This Perry, what a barracks room humor lol

 
At 2/11/2009 1:08 AM, Anonymous Anonymous said...

it would appear that only members of the exchange can affect the BDI, so scope for speculative fluctuations is indeed minimial ie. can only buy a shipload from a fellow member only if he actually has a ship to spare! Similarly good article over at http://ourmaninoz.com/2009/02/09/the-baltic-dry-index-why-is-it-important/

 
At 2/11/2009 2:52 AM, Blogger coracle said...

If you're interested in following the ups and downs of the shipping markets then you might be interested in our podcasts at www.ShippingPodcasts.com

With regards the comment that the BDI is "is totally devoid of speculative content," please note that the BDI is the index used to settle freight derivatives contracts (FFA's) and this market has attracted many speculators over the past few years.

 
At 2/22/2009 4:15 PM, Anonymous JustinW said...

I have to agree with the professor. http://www.jwpm.com.au/The%20Baltic%20Sea%20Index.pdf This is one of the few indexes that has consistently forecast future growth in the global economy and is completely devoid of sentiment. Don't be confused regarding freight ships being "laid-up". Bulk carriers are different beasts to container ships. Remember also that the stock market is not a direct measure of the real economy – it’s not even a reflection of what people think the real economy is. It really only measures what people think other people think the stock market is about to do.

 

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