The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation. It also factors in all four sizes of oceangoing dry bulk transport vessels:
|Ship Classification||Dead Weight Tons||% of World Fleet||% of Dry Bulk Traffic |
|Supramax||52,454||37%||25% w/ Handysize|
|Handysize||28,000||34%||25% w/ Supramax|
This index is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. This could also be gleaned from looking at commodity prices, but there are substitution effects and futures contracts that make it difficult to interpret the impact of commodity price fluctuations. Additionally, nearly all commodities are seeing severe increases in prices in 2008 regardless of supply situations as investors seek to hedge their inflation exposure with hard assets.
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.  The BDI will show how much a company or country is willing to pay to import raw materials immediately. For example, if a Chinese company has contracted out coal prices for the next year from Rio Tinto (RTP), then the spot price of coal increasing after a mine accident will not impact that established contract. However, when this company is willing to pay more per ton to ship the coal than to actually purchase it, an investor can see that price growth is accelerating.
As the BDI increases, so effectively does the cost of raw materials. This cost associated with procuring the materials must be passed along the value chain by producers and refiners. In the end, consumers will see higher dry bulk rates in the higher prices they pay for goods derived from these raw materials. For example, when Folgers pays an extra $10/ton to import coffee beans, they will pass along this increased procurement cost to consumers to maintain margins.
Additionally, imported goods may often carry a BDI factor in the prices. An example of this would be the average Chinese imported good. As China transformed from coal exporter to importer, they began buying coal from nations such as Russia, Brazil, and Australia. The coal from the latter two must be shipped using dry bulk carriers. As the rates for the BDI went up in 07, so did the cost of coal to China. Since coal is used for 70-80% of China's energy generation,  overhead costs for factories increased with the price of coal. As the overhead costs increase, so must the price of the end good to maintain the margin of profit. As this end price increased, an American paid more for a t-shirt or toy at Wal-Mart.
In the current scenario any rise in price of consumer goods is not possible but if this trend continues for an extended period the companies tend to pass on the prices to the end users to maintain its margin
Shipping industry publication "Lloyd's List" publishes a comprehensive list of input and route specific indices. These can be used to gauge demand on certain inputs. Economic activity can also be extrapolated by examining where rates are rising/falling on specific routes.
When the BDI increases, dry bulk shipowners win. The increase in the index directly increases their margins and revenues.
When the BDI decreases, every other consumer/producer in the global value chain wins. Since the BDI measures procurement costs, when these costs go down, producers benefit from increased margins, and consumers benefit from lower prices for finished products.
When an investor buys a dry bulk shipping stock, they are effectively buying into the Baltic Dry Index. The amount of exposure depends on the individual stock. Some companies, such as DryShips (DRYS), have most of their ships contracted out at the spot Time Charter Equivalent. This means that the contracts are directly correlated to the daily price of the BDI. Thus, their revenues are directly tied to the index. In times of increasing prices, this set up will yield greater profits for the shipper. Other companies, such as Diana Shipping (DSX), have contracts set at the period Time Charter Equivalent. This means that they enter into a contract, usually 2-5 years in length, which pays a fixed daily rate. This set up provides less volatility, hedges risk against falling BDI rates, and guarantees cash flows.
Because dry bulk ships are expensive, fungible assets, shipping companies often have high asset values, and their stocks tend to show up on value screens. Some argue for comparing the relative values of shipping companies based on their Net Asset Value.
|Market Cap in $Millions (11/12/10)|
|Diana Shipping (DSX)||1,100|
|Genco Shipping (GNK)||559|
|Excel Maritime Carriers (EXM)||509|
|Eagle Bulk Shipping (EGLE)||342|
|TBS International (TBSI)||137|
|Navios Maritime Holdings (NM)||605|
|Safe Bulkers (SB)||528|
|Seanergy Maritime Holdings (SHIP)||103|
|Star Bulk Carriers Corp. (SBLK)||189|
|Paragon Shipping (PRGN)||196|
|Navios Maritime Partners (NMM)||929|
|Omega Navigation Enterprises (ONAV)||23|