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What is the Baltic Dry Index?

Baltic Dry Index

Baltic Dry IndexHave you ever heard of the Baltic Dry Index? Every day at the port of Singapore are loaded dozens of large container ships: ships moving in the dangerous Strait of Malacca, across the Indian Ocean, passing down the Somali coast, fly up the Red Sea and cross, in an orderly line, the Suez Canal, to enter the Mediterranean and finally to European ports, Antwerp, Genoa, Marseille, Rotterdam.

Even before the ship moves, however, a shipbroker, calls the shipping companies and asks how much it costs to transport a particular cargo to a particular destination. If the price is good, he concludes the deal and books the shipment. Some of these shipbrokers, active on major routes, do not really have a customer who intends to ship goods through the oceans.

They work for the Baltic Exchange, headquartered in London, a story that dates back to an old open office in Threadneedle Street in 1744 under the name of Virginia and Baltik because shipowners came from the Baltic. The broker marks the price shall be transmitted to him by the shipping company, for a load of raw materials. They do it in so many, scattered around the world, and they all send their data to the Baltic Exchange, which processes the Baltic Dry Index in this way.

Baltic, although it has nothing to do with the Baltic Sea: it deals with routes and shipments around the world. Dry, this is trivial because the treated materials are, literally, dry. No food or compound products: only commodities, from coal to grain. Index, because it is an index, which can be consulted on the world's major financial sites, updated every day of the year. For the sake of accuracy, an index that measures the shipping cost of raw materials in the world, calculated on 20 highly trafficked routes.

Therefore, the Baltic Dry Index compares demand (commodities to be shipped) and supply of shipment (merchant ships fleet). But why is it considered a reliable indicator? Because building new ships requires years of work: the supply side, therefore, does not undergo sudden variations. Similarly, the shipping market is not subject to speculation, like others: if I book a ship and a shipment, considering the costs, is because I really need to send a commodity.

Why then consult the Baltic Dry Index? Because raw materials are used as the first tool of any production process, from computers to skyscrapers. If the Baltic Dry Index drops, it means that the shipping price has dropped, and therefore the demand for raw materials is decreasing globally. The first sign of economic slowdown. And vice versa: when the index rises, it means that there are not enough ships to meet the demand for shipments and therefore the economy goes towards a period of growth and greater production. A change that is immediate: overnight a ship somewhere has a load more or less.

An example? The Baltic Dry Index hit its peak in 2008 to plummet soon after, anticipating, for those who saw it, the collapse that, after the stock exchanges, has hit the real economy.

 

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