The Baltic Dry Index (BDI) measures the average cost of freight transport on major global routes. It is based on the transport of basic products (bulk) such as cereal, steel or coal. More specifically, it measures the demand and supply of the containers used to transport these goods.
As it is based on future contracts, it allows us to predict how the economy will behave in the following months. For this reason it is considered a leading indicator of the economy, but not so much of raw materials. In other words, it is a very important indicator for trading in general.
It is published daily in London. It was created in the 28th century, but became an organization in the 19th century with the advent of industrialization. The BDI collects data on the prices of raw materials that are transported in the rough. That is, outside of any form of packaging (carbon, aluminum, steel, copper, etc.).
It also does not include petroleum or refined petroleum products. Despite this, about 22% of the goods and 30% of the value transported (14 billion dollars per year) goes through some form of Dry Bulk or bulk cargo.
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Freight transport is also grouped by the size of the ships. For example, Capesize means ships between 120,000 and 400,000 tons that cannot cross the Panama Canal. They normally carry iron ore and coal. Panamex are ships between 60,000 and 120,000 tons and Supramax are ships for 40,000-60,000 tons.
The BDI is made up of 40% Capesize and 30% Panamex and Supramax. And it has sub-indices to measure the evolution of each of them, with Capsize being the most cyclical and volatile because it is the most used for the transportation of raw materials.
The BDI is moving between 1,000 and 2,000 points and is now trading around 1,100 points. It falls when a recession approaches (falls from May 2022) and rises when a recovery approaches (lows end of September 2022). For this reason it is an important leading indicator of the economy and a relevant indicator for trading in general.
This is so, because these contracts are closed a couple of years in advance. This time is what is needed to mobilize one of these transports. For this reason, bulk shipping is very inelastic and any increase in demand is reflected in the index.
This is what happened after Covid. The demand for raw materials skyrocketed, which increased the need for their transportation, while the loading and unloading of ships were delayed, which kept them moored at the port for longer than normal and, therefore, out of the market .
Although it may seem otherwise, the BDI is not an indicator of the price of raw materials. It is true that when the demand for raw materials rises, the need to transport them rises, but that is all. For example, when oil is expensive, freight travels slower to save fuel.
Come on, the BDI is a measure of freight prices on a given date, but not an advance price of raw materials. This is important for trading, because it is a leading indicator of the economy, but not commodity prices.
The IDB is not an index that can be invested in. It is not traded nor are there derivative products on it. However, it is possible to trade based on the BDI, but through derivative instruments such as futures contracts. The best way to invest in the index or in the sector is through listed companies that are engaged in freight transport.
To do this, it must be understood that the profitability of these companies does not depend only on the volume of transport, but also on the price of fuel or the management of their business by each of them.
Another strategy that allows the BDI is to position yourself long or short in oil depending on the evolution of the index, since an increase in the BDI implies a greater demand for fuel in the face of a greater number of ports.
In short, the BDI is an index that measures the price of transportation of some basic raw materials for the smooth running of the world economy. When the BDI rises it is because the economy is going in the right direction and when it falls it is because a recession is expected. In that sense it is a leading indicator of the economy.
However, it is not an index to measure trading in raw materials because it is greatly affected by the price of fuel, but not by the price of the raw materials it transports.