The Baltic Dry Index As a Growth Indicator

Everyone is talking about the Baltic Dry Index these days so I figured I might as well chime in. On Wednesday, I actually wrote about the sharp decline in the BDI for my daily report at GFT Forex but since then, the sell-off has worsened.

What is the Baltic Dry Index?

The Baltic Exchange’s Dry Freight Index was once termed, the “Best Economic Indicator You’ve Never Heard Of” by Daniel Gross. This index is closely followed by all Wall Street Insiders because it is a good indicator of economic growth and production. In a nutshell, the BDI reflects how much it costs to ship raw materials (like coal, iron ore, cement and soft commodities like grains and sugar) by sea. The level of this index is also impacted by fuel costs, fleet numbers and seasonality but if the index rises, it means that demand is generally strong causing other ports to be congested.

Back in August 2007, I looked at the Baltic Dry Index to determine whether commodity prices should continue to rise. Interestingly enough, a full year later, the sharp decline in the BDI illustrates the recessionary conditions that consumers are feeling globally. It also suggests that we could see further losses in oil prices.

Here is a chart 23 year chart of the BDI (white line) against oil prices (orange line). The strong correlation between the two indexes should be clear:

Comments

[BlueDog]

It's a good time to buy shippers. EXM, DRYS, TBSI.

[FulhamFC]

You can't ship if you can't get credit for your cargo. Look at the Baltic dry index to break out once credit starts to flow again. Thats how I see this drop.

[bosunj]

Asia to Europe 40ft box is now $700 down from $2200! $700 is below cost. Many fewer boxes are being put on ships. When will Maersk Sealand and others reduce capacity? Reduced capacity will result in longer shipping times.

[paultaut]

Stick with the ones which have long term contracts in place and most of their ships contracted.

[bosunj]

Freight is right now sitting on docks because the Banksters don't trust each other. International shipping requires letters of credit. Banksters aren't accepting these instruments in increasing cases. Are these companies going to operate when no one tenders shipments?

[jasemi1]

PRGN is contract chartered for the next 2.4 years. Increased dividend at last statement of earnings..80 million in cash..