For decades the Baltic Dry Index (BDI) has been seen as a proxy of global supply and demand for staple commodities around the world. Loose raw materials like coal, steel, grain and minerals need huge ships to carry them across the world’s oceans from supplier to where the demand is.
The BDI is effectively a measure of shipping costs to transport raw materials. Created by the London-based Baltic Exchange in 1985, it works by the exchange directly contacting shipping brokers to assess price levels for a given route, a product to transport and time to delivery, or speed.
TAKING WORLD TRADE’S TEMPERATURE
That has made the BDI an important economic indicator, a quick and easy way of taking the temperature of the lifeblood of the global economy by measuring the cost of dry bulk cargo ships.
But its relevance has being called into question. This is largely because as global trade increases cargo ships are getting much bigger. They carry far more stuff but take longer to build, creating a lag between shipping demand and supply.
This can mean a shortage of available cargo ships when demand for commodities rallies, forcing shipping prices higher and faster than the underlying trend.
And it works in reverse, as commodities demand falls the world is left with a glut of shipping capacity, exacerbating the slump in cargo ships prices.
In spite of the time lags the BDI is still watched closely by investors and economists looking for a steer on world trade and its wider impact.
Interestingly, the world's biggest container shipping group Maersk of Denmark, is raising its shipping prices in response to higher marine fuel costs.
