Baltic Dry Index indicates a collapse in global trade

January 20th, 2009

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Today, we will introduce to you a new economic indicator- the Baltic Dry Index (BDI). According to the Wikipedia, the BDI is a

… number issued daily by the London-based Baltic Exchange. The index provides “an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

The BDI is a price index. As we all know, prices are determined by the supply and demand for shipping. The supply of shipping is fixed and not easily susceptible to price change (i.e. inelastic in economics jargon) because

… 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.

Therefore, prices of shipping are mainly affected by its demand in the short term. So, what happened to the BDI over the past several months? Take a look at this graph:

Baltic Dry Index chart

As you can see, in May 2008, the BDI fell from a record high of 11,793 to a low of 663 since 1986. It has been said that such low reading means that shipping costs is very close to the “combined operating costs of vessels, fuel and crew.”

As the Wikipedia article explained,

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.

The BDI is a leading economic indicator in the sense that changes to it will occur prior to what will happen in the global real economy. Therefore, any recovery in the global economy should not precede a recovery in the BDI.