THE BALTIC DRY INDEX

[Name of Student]

[Name of Affiliate Institution]

What is the Baltic dry Index?

Investors are always looking for credible economic indicators that they can use to make sustainable solutions to their problems. Peter Lynch, who is a renowned manager from the Fidelity Magellan Fund, reiterated of finding practical indicators around everyone’s daily lives (Sindhi, 2013). That may include looking at what products friends were buying or what stores seemed to be ever crowded. That is relatable to the Baltic Dry Index (BDI) which is a practical economic indicator on an international scale.

Baltic Dry Index is the measure of what it would costs to ship raw materials like steel, coal, iron ore and cement around the world. It is the equilibrium price of shipping raw materials, decided upon by the number of cargo ships and the market demand for shipping raw materials. The Baltic Dry Index is affected by the demand changes for raw materials and changes in oil price (Sindhi, 2013). Changes in the BDI appear on the changes of global demands for manufactured products. Furthermore, this demand affects the price of crude oil, which consequently impacts the cost of maritime shipping. To get a complete view of the whole shipping industry while searching for various transportation costs, the Baltic Exchange goes through the costs of each of the following four ship sizes.

Capemax, which accounts for 10 percent of the global fleet, this are ships capable of carrying 100,000+ tons of deadweight and are, therefore, too big to pass through the Panama Canal. Panamax, which covers 19 percent of the world’s fleet, they are ships that carry between 60,000-80,000 tons of deadweight cargo and can hardly pass through the Panama Canal. Supermax or Handymax makes up about 37 percent of the world fleet; these ships carry 40,000-59,000 tons of cargo. The handy size takes 34 percent of the world fleet consisting of ships that carry between 15,000-35,000 tons of cargo (Branch & Branch, 2012).

How is Baltic Dry Index Constructed?

The indices, formerly called the Baltic Freight Index, are calculated in the following way. An independent panel of ship brokers around the world anonymously submits their best estimates, expressed in US dollars, for hiring pre-defined vessels on pre-defined routes. Submissions go to the Baltic Exchange each day at 13:00 London time. Neither ship-owners nor companies with goods to ship are on these panels, and brokers as intermediaries have no interest in submitting high, or low, numbers as they have no money at stake in the maritime markets themselves.

A panel of independent shipbroker who constructs the Baltic Indices every market day gives the Baltic Exchange data. The freight rate reported in the market is an average of the panels assessments acquired by the Baltic Exchange on that day. A constant digit that is meant to convert individual freight rates to an index numbers then multiplies the mean freight rates. The multiplier is a distinctive constant digit for all routes and shows the significance of all component routes for the calculation of the total index (Sengupta & Tam, 2009).

The alignment of the Baltic routes has to show real time trends. The Baltic Exchange and committees, consult derivative brokers, market users and the industry, to guarantee that market figures remain illustrious of market trends. In selecting the shipping routes, the Baltic Exchange is governed by the principles of liquidity, market coverage, and transparency.

Baltic Dry Index Use to the Bulk Shipping Industry

The Baltic Dry Index is a leading factor that gives a glimpse into the worlds demand for raw materials and commodities. The fact that the Baltic Dry Index centers on raw materials is crucial. That is because the request for raw materials provides an insight into the future. Companies order for raw materials once they start making finished goods and infrastructures such as heavy machinery, roads buildings and automobiles. Producers stop the acquisition of raw materials once they have surplus amounts in their inventories or when they finish infrastructure projects.

Usually, demand for raw goods and products go up when the universal economy is growing. For investors, having knowledge of when the world’s economy is rising is useful as it means commodity prices, stock prices, and the worth of commodity-centered currencies should be swelling. On the other hand, demand for natural goods and products lessen when global economies are contracting or stalling. For shippers, telling when the world economy is falling is vital because that means commodity prices, stock prices, and the value of commodity-based currencies should be going down.

The Baltic Dry Index also serves as a compelling indicator as it is a real-time and simple, indicator to manipulate difficultly. Some economic indicators such as inflation indexes, unemployment rates, and oil prices are hard to interpret as they are prone to manipulation or influence by the government and speculators. The Baltic Dry Index is difficult to manipulate as definite forces of demand and supply manage it (Brodie, 2013).

The only factor that hinders the Baltic Dry Index is the number of ships available to move goods around the world. It is hard to manipulate or change this supply as it takes years to construct a new ship and even put it in service to increase supply. It would cost much time and resources to leave ships empty while trying to cut supply. The primary factor that hampers the Baltic Dry Index is the demand from product buyers who want raw goods for production (Branch & Branch, 2012). It is hard to distort or manipulate this demand as only those that have placed orders on raw materials to be shipped can calculate it. No willing person can offer to pay for the book of a Capemax cargo ship and is not going to use it.

References

Branch, M. A., & Branch, A. E. (2012). Elements of Shipping New York: Routledge.

Brodie, P. (2013). Commercial Shipping Handbook, Second Edition. New York: CRC Press.

Sengupta, R., & Tam, Y. M. (2009). Economic synopses. Recent Movements in the Baltic Dry Index, 1-6

Sindhi, V. (2013, 10 14). Baltic Dry Index (BDI). Retrieved from container-transportation: http://www.container-transportation.com/baltic-dry-index.html