Baltic Dry Index – A Leading Indicator of Metals Prices

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Global Trade, Supply & Demand

We have referred in the past to the Baltic Dry Index (BDI) as a measure of the rates paid for the movement of dry bulk commodities like iron ore, coal, grain, etc by sea. The Baltic Exchange in London creates the index by taking rates paid on three sizes of vessel, Supramax, Panamax and Capesize averaged over 26 global shipping routes measured on a time-charter and voyage basis. In short the index is a measure of the rates shippers are willing to pay.

When rates are high, shipping space is in high demand and when rates fall there is a surplus of space. When rates fall fast it is a strong indication of rapidly falling demand because the availability of new shipping space is a function of the rate at which new vessels are built ” which clearly take some time to build.

So why would we be interested in shipping space on the other side of the world? Well significant movements of the BDI indicate trends in demand for major commodities. In the early part of this year, rates climbed dramatically and at the same time there were frantic negotiations around iron ore prices in Asia which pushed the new annual contracts secured by the Australian miners to record highs. Since then the BDI has dropped by 66% since May to the near five year lows as the steam has gone out of the metals markets in general and the iron ore market in particular. The spot price of iron ore for immediate delivery in China has fallen to $111 a ton, down from $198 a ton in February. Much of this decline comes from a drop in shipping costs according to Bloomberg. With recent reports of high domestic steel stocks in China, falling prices globally and weakening demand it looks like the BDI has lived up to its reputation this summer as an indicator of trends. Readers interested in tracking the index can log on to DryShips daily market report page here.

–Stuart Burns

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