Keep An Eye On The Baltic Dry Index

The Baltic Dry Index (BDI) or the "Baldry" is a measure of what it costs to ship raw materials — like iron ore, steel, cement, coal and so on — around the world. The BDI is compiled daily by London's Baltic Exchange, whose members are buyers and sellers of shipping contracts. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. The information from a variety of categories like shipping routes, types of cargo and ship sizes is collected and amalgamated into the BDI.

In a nut-shell: The BDI shows how much people are willing to pay to ship certain raw materials around the world.

Why Watch The Baltic Dry Index?

The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the BDI focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. People don't hire a ship unless they have cargo to ship.

Typically, demand for commodities and raw goods increases when global economies are growing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting.

Interpreting the Baltic Dry Index

When the BDI is moving UP - Global economies are starting to, or continuing to, grow.
When the BDI is moving DOWN - Global economies are starting to, or continuing to, contract.

Current Status

The BDI was at 11000 plus levels in January; from those levels it fell to 850 in October. The BDI is now trading at levels not seen since 2001.

The Baltic Dry Index's recent plunge:

Source: Bloomberg

The recent plunge has been exaggerated because banks have been reluctant to issue Letters of Credit. “Letter of Credit” (LC) is a guarantee issued by a bank that the buyers funds will be transferred to the seller at the completion of the transaction. Still the BDI started falling in January 2008, much before the crisis erupted, clearly proving its worth a leading economic indicator.

So, keep an eye on the BDI, it will start rising when the downturn ends and economies recover.

For more information visit:

http://www.wikinvest.com/stock/Baltic_Dry_Index_-_BDI_(BALDRY)

For the latest value of the BDI visit:

http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY:IND