Baltic Dry Index seen as positive indicator for global markets

September 4, 2011 2:49 pm

The Baltic Dry Index is a leading indicator of economic activity, since prices are made only by the member companies. Agreements are being made between parties which need cargo to be transported and companies which own vessels to move the cargo.

In short, the BDI offers a real time glimpse of demand for global raw materials and infrastructure.

The chart above illustrates the ‘upticks’ since the beginning of August. The last few weeks, the BDI has risen more than 20%. However, the index has only reached a high of 1,585 this year, which is still a long way from the peak of 4,100 reached in 2010, let alone the 2008 high of around 11,700.

Although these peak highs are not even in sight, it is a strong sign that rents for the ships that account for 40% of dry-bulk fleet capacity have rallied this month as higher commodity exports helped relieve a vessel glut. The surplus (of vessels) caused average rates to plunge to the lowest level since 2002 over the year’s first two quarters.

Although the BDI can be a harbinger of future economic developments, it is better to analyze this index in conjunction with forward freight agreements. FFA’s are used to bet on or hedge the cost of shipping dry-bulk commodities by sea.

This week, October-to-December capesize [vessels] contracts were trading lower for the first time in 12 sessions, after gaining 16% over the last week, according to data compiled by Clarkson Securities, which is the freight derivatives unit of the world’s largest shipbroker.

Nevertheless, voyages for capesize vessels booked for loading from ports in the Atlantic region may have secured daily rates up to $43,500, according to the Baltic Exchange.

“Capesizes” are typically dry bulk carriers and have a common characteristic of being incapable of using the Panama or Suez canals, not necessarily because of their tonnage but because of their size. These ships serve deepwater terminals handling raw materials, such as iron ore and coal.

As a result, “Capesize” vessels transit via Cape Horn (South America) or the Cape of Good Hope (South Africa). Their size ranges between 80,000 and 175,000 dwt (deadweight tonnage).

Due to their size only a comparatively small number of ports around the world are available with the proper infrastructure to accommodate such vessel size.

As stated before: the BDI is showing some green shoots, but only time will tell whether the global economy will pick up or not. So, also watch indicators like the BDI and FFA’s carefully and not only the ‘conventional’ markets like stock and commodity markets.