Baltic Dry Index at 2009 high and what it means

LONDON (Commodity Online): The Baltic Dry Idex (BDI), the global benchmark for freight costs for dry bulk commodities has a hit a 2009 high of 4381 points as bids rose for the Capesize vessels that transport iron ore and coal to China. Analysts have described BDI as the purest leading indicators of economic activity as it measures the demand to move raw materials and precursurs to production, as well as the supply of ships available to move this cargo.

The Financial Times quoting Peter Norfolk of SSY Consultancy and Research said that at the start of 2009, 170 Capesize vessels were on order for delivery this year but new ship availability amounts to only 35 vessels at present due to congestion and scrappages and the fact that some greenfiled shipyards have either not been built or have not delivered on schedule.

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.

BDI measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [1]

The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation.[2] It also factors in all four sizes of oceangoing dry bulk transport vessels.

The Baltic Dry Index, had its ups and downs this year as in August first week it fell 17.2% from 3,350 to 2772 on falling coal and iron ore imports by China. At that time China's steel mills were locked in negotiations with foreign miners over import of iron ore and there fore, BDI fell to one of the lowest levels.