Tue 15 Aug 2006
If you don’t have too much too look at and think about yet, add the Baltic Dry Index to your list of things to watch. The index is a representation of dry freight rates for ocean going shipments of things like coal, grain, or cement.
The BDI is good to watch because it acts as a leading indicator of economic activity. It can’t be manipulated like official Government statistics, and it isn’t subject to speculative over-buying or selling like the futures markets. We might see “conundrums” regarding the price of bonds or their rates, but it would be very difficult to misunderstand a change in the price of bulk shipping.
Right now you can look at the index and see that it is still climbing since mid-2005. That’s either economic growth or inflation… or both.
They also have the individual Capesize, Supramax, and Panamax rates which are the ingredients of the BDI shipping rates. For example, Panamax rates would be the shipping rates for the largest ships that can still fit through the Panama Canal.
There are good articles on the BDI here, here, and here.
August 15th, 2006 at 12:12 pm
Do you think there is potential for the activity of governments and futures speculation to influence this index? I just wonder if, though not direct, the speculative or regulatory influences might find themselves reflected in this index, especially if it’s tied to the “value” of the cargo.
August 15th, 2006 at 1:03 pm
Speculation and regulation certainly could affect the index, it’s just no where near as direct as in freely traded markets.
For example, if a hedge fund is buying copper and storing it in a warehouse, that could affect the shipping rates if they had to ship the copper to their warehouse, or if they cause undue shifts in the supply chain of existing copper sales (i.e., the hedge buys copper in Bolivia forcing a Chinese buyer to buy from a local source instead). So the influence could be up OR down, depending on the specifics.
Likewise, governments make all sorts of silly regulations (like the Jones Act) that affect shipping and shipping rates. Any undue tarrifs can cause supply chains and shipping preferences to shift causing a skew in the rates.
In large though, BDI is not very widely followed and thus not a target of direct manipulation (conspiratorially like CPI or GDP would be).
BDI seems like a reasonable gague of global economic activity. I doubt I’d use it for trading signals, but rather to confirm other indicators, or to act as a leading indicator for general economic activity.
August 15th, 2006 at 1:18 pm
I like the idea. I saw an article somewhere about a trader using shipping costs to China as a gauge of the “Chinese effect” on the economy. His basic thesis was as long as those costs are doing well, then China remains a player worth watching. I’ll have to see if I can track it down.
October 10th, 2006 at 10:36 pm
There’s a good article on the Baltic Dry Index over at Capital Chronicle.
April 1st, 2007 at 8:37 pm
Ticker Sense does a bit of analysis on the BDI here:
http://tickersense.typepad.com/ticker_sense/2007/03/baltic_dry_frei.html
July 26th, 2008 at 7:18 am
There’s another good article on BDI and it’s importance at Minyanville.
“Now, why is the Baltic Dry Index considered important? Well, first off, it’s not a speculative index. In other words, no one is out there bidding up the Baltic Dry Index because they believe shipping costs will change in the future. Instead, it tracks the actual cost of shipping raw materials by sea based on real cargo bookings and is therefore considered a pretty good indicator of global trade volumes.”
Downturns in BDI tend to show slowing economic activity.