What is the Baltic Dry Index?
Even if you follow the markets and global economic news, you still may not be familiar with the Baltic Dry Index (BDI) and why it matters.
The Baltic Dry Index is a dry bulk shipping index that tracks the cost of hauling different materials or commodities. It is issued by the Baltic Exchange in London which was founded in 1744.
The BDI is composed of three separate indices – Capesize, Panamax and Supramax. These three indices track the change in shipping costs for dry bulk on different sizes of boats, Capesize being the largest and Supramax being the smallest.
Shipping brokers give their valuation of freight costs of 20 separate routes to the Baltic Exchange daily. These 20 routes include five for Capesize ships, five for Panamax ships, and ten for Supramax ships. On March 1st, 2018 the BDI was re-weighted to: 40% Capsize, 30% Panamax and 30% Supramax.
Why is the Baltic Dry Index important?
The Baltic Dry Index is important because shipping is an important indicator of how the global economy is doing.
The BDI is a very useful gauge of global trade, and tells you how much it costs to move goods around the world in large ships. These goods can be pretty much anything: iron ore, grain, coal, rhodium, silver, copper, and so on. Stuff the world needs to continue developing and building.
As such, analysts whose job is to predict the health and future of the global economy like to pay close attention to it.
It is commonly used as a so-called canary in the coal mine for the state of the world economy and how well international trade is doing. If the price of the BDI is low, it suggests that trade is slowing down.
This matters because BDI drops have historically predicted economic crashes.
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