Baltic Dry Index: The Best Economic Indicator You've Never Heard of

Both Dennis Gartman and Larry Kudlow have reported recently on the recovery in the London-based Baltic Dry Index (BDI), "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain."

A few years back, Slate Magazine called BDI the "The best economic indicator you've never heard of."

The chart above displays the BDI over the last three months, and shows the strong 34% increase in the BDI since its low in mid-December. Could this be a recovery "mustard seed?"

Comments

[Conan the B...:]

A lot of builds have dried up, some have not only stopped construction but lost deposits rather than continue, DRYS is in financial trouble.

A tanker was bought by SBLK for around the price of the Charter last year. Since these puppies not only are very expensive to build but also use a heck of a lot of raw materials, its no wonder that steel demands simply dried up.

The big problem the shippers with Long term charters have is that there are early cancellation clauses in many contracts. They get a cancellation payment but a $100K charter winds up on the spot market which is running around $14K, operating costs are around $8 K, at least for SBLK.

A big plus for new oil tankers will be the removal of single hull competition by the end of 2009. That is good for carriers like NAT and TNK.

Scrap steel anyone?

Jan 30 12:10 PM

[ain't no fo...:]

The BDI is a compilation of spot prices reported on a daily basis by dry bulk ship owners, and covers 40 shipping routes throughout the world. It can't be traded directly, although there are futures that can now be traded, I believe on one of the exchanges in London. So you have to trade the individual shippers for the most part, or one fairly new ETF.

The chart by Mr Perry is a typically disingenous attempt by the author to slap lipstick on a pig in hopes of painting a rosy picture of the world economy as reflected in dry bulk rates... it fails to make note of the fact that the BDI at 1070 today is STILL down more than 90% from its May 20, 2008 high around 11,600.

It also fails to reflect the fact that many (most?) dry bulk shippers are, or are about to be, called on the carpet by their banks for failure to meet minimum loan covenants... and that the shipping companies' balance sheets are in terrible shape due to collapsing ship values which are in turn triggering fears of impending loan defaults and covenant breaches.

Many ships are merely lying at anchor in Greece and other areas with no work whatsoever, not even spot work.

Take a look at DRYS this week (and since May 2008) if you want to see the REAL picture of what is happening in this industry. Here is the chart, representing a fall from $115 to 6 today:

stockcharts.com/h-sc/u...

Despite some cancellations of newbuilds (at high penalty to the shippers who ordered them), there is still a very large supply of newbuilds in progress in the world's shipyards, and they will be filling a weak demand market over the next couple of years. High supply of ships, low demand for cargoes and collapsing ship values is not a recipe for a healthy prognosis for the dry bulkers at present.

Jan 30 12:45 PM

[John Lounsbury:]

Patio - - -

Thanks for the link. The latest BDI value I get from the chart is about 1030. The value at the bottom is, I believe, 666 (thanks jegan). The high earlier in 2008 was around 12,300 (from the patio link). That means we have had a drop to the bottom of about 95% (thanks paultaut) and a rebound of about 3% of that 2008 high. Dead cats bounce higher than this.


On Jan 30 08:47 AM patio wrote:

> www.bloomberg.com/apps...;exch=IND&x=15...
>
>
> Oh, there is no question, my, what a recovery!

Jan 30 01:11 PM

[John Lounsbury:]

Mark Perry - - -

I don't understand the +34% on your graph. I calculate the rise from the bottom as approximately 55% of the bottom value (about 666). No matter what the value actually is, I don't think it is significant, because a rise from 666 to about 1030 is miniscule compared to the drop from the 2008 high above 12,000.

Can you comment further?

Jan 30 01:16 PM

[John Lounsbury:]

Correction: I looked up the exact 2008 high for the BDI; It was 11,793. The percentages I calculated in the previous comments are affected in an insignificant manner.

Jan 30 01:33 PM

[Mark Anthony:]

The Bottom of BDI index was indeed 666, an easy to remember number. It happend on Dec. 4, 08 (12/4/8, half of which is 6/6/6). I called it perfectly and I loaded boat loads of DRYS near the bottom:
stockology.blogspot.co...

I also correctly warned about DRYS and urged folks to swtch from DRYS to EXM. It was a very timely warning of caution on DRYS. Look at what happened today!
seekingalpha.com/artic...

Jan 30 01:42 PM

[notsosmart:]

review this guys articles.he writes weird stuff.

Jan 30 02:10 PM

[ain't no fo...:]

Well, EXM isn't exactly setting the world on fire... even after this week's slaughter in DRYS its bounce off the lows is the same % as EXM has had, and with the debt load and cratering ship values that EXM is paying off on the inflated QMAR values it paid for last spring, I have no idea why you think EXM is going to avoid a few calls from its banks... that fat dividend is unlikely to hold very long.


On Jan 30 01:42 PM Mark Anthony wrote:

> The Bottom of BDI index was indeed 666, an easy to remember number.
> It happend on Dec. 4, 08 (12/4/8, half of which is 6/6/6). I called
> it perfectly and I loaded boat loads of DRYS near the bottom:

>
> stockology.blogspot.co...

>
>
> I also correctly warned about DRYS and urged folks to swtch from
> DRYS to EXM. It was a very timely warning of caution on DRYS. Look
> at what happened today!
> seekingalpha.com/artic...

>

Jan 30 02:24 PM

[Conan the B...:]

Something, those of you interested in buying into a shipper or two, should look at is the news on Teekay(TK) in relation to something called the Gemini Pool.

I haven't looked at it since I spotted a news release from TK that Frontline(FRO) added 2 suezmax vessels to it.

At the time, it was 36 SZs strong.

Jan 30 04:16 PM

[Stone Fox C...:]

Its funny reading all the comments about the BDI being up 30 or 50% from the bottom but still down 95%. What's relevant is how the market perception versus the reality. The perception is that the world continues to get worse when in reality an index such as the BDI has rallied very strong. Whether its due to stronger demand or less supply doesn't matter. Maybe it's just a dead cat bounce or maybe not. What matters of course is what happens in the next month or two or three.

It would be wise for investors to keep an eye on this index. Its a leading indicator.

Jan 30 05:40 PM

[keithpiccir...:]

Too early to gather much of a position. Transports are usually early bull movers:

www.marketoracle.co.uk...
I had DRYS as a trade from $5.6.-$6.50 or so and exited, and recently got stopped out of EXM with a 2% loss so I have been interested.
One other real concern, is what was mentioned earlier about the survivorship of some of these dry bulk shippers with broken covenants and lack of credit/lending. When blood goes into the water the surviving sharks will be even stronger and good to profit from.
Steel is another shipped commodity to watch - China infrastructure requirements will be great and the last report I read they were shutting and limiting domestic production.

Jan 30 09:34 PM

[tonyb:]

trade is dropping like an iron ball. the increase sited is miniscule. some ships are being used now to store commodities such as oil in contango. do you really want to go long now. and lastly, kudlow is delusional with respect to the economy--you will not stop the freightrain of deleveraging--savings will increase to > 5%, the average american is up to their eyeballs in debt, 1 in 5 are upside down in their house, we have 5-6 million more foreclosures over the next 3 yrs to get through, the re-default rate is 50%, the unemployment rate is skyrocketing, corporate profits are plumetting, and the consumer cannot save them. one more thing--the government is broke, in more ways than one.

Jan 30 09:56 PM

[Big K:]

Perhaps the best investments now are Glocks, Gold and Gumbo (cans of soup). I call this the 3 Gs. As economic activity continues to shutdown, we descend into the new "Frontier Land". There is no hope to stop this slide into an 18th century style economy, where your job will be to hunt, barter, gather and grow. Thank you to the greedy bankers of Wall Street and corrupt politicians in Washington who created such negative wealth (debts and liabilities), that it simply canceled out the real wealth. And, of course, for turning us into the new India. It was a good gig while it lasted, but they really shat in the bed this time. We all look forward to living in tent cities and cardboard box towns, at least until we can build a shack in the woods.

Feb 01 10:47 PM

[meta99:]

This has got to be the stupidest thing I've ever seen. +34%!!! BS, its down, just on this chart alone, from 1210 to 1030, a drop of 15%. Any idiot can take the high and low of a chart and find an up pattern. What this chart DOESN'T show is that this index peaked at 11,600!!! Talk about a collapsing parabola, I wouldn't touch shipping with a 10 foot boat anchor! Any time you get a parabola of this magnitude collapsing, it will take YEARS before things get good again. Please ignore these dead cat bounces, they are only good for day traders. You will catch your lunch if you think otherwise.

Feb 01 11:42 PM

[It's Only M...:]

John Ritchie, a wealth manager in the Portland, Ore. area, cut his clients' losses last year by watching the Baltic Dry Index. More at blog.oregonlive.com/fi...

Feb 02 01:40 PM

[ramisle:]

65% of Dry Bulk shipping is Iron Ore and Coal, it would be wise to look downstream, the miners and steel makers are all cutting production. The Chinese are negotiating a 40% price cut on benchmark price of Iron Ore, this contract sets the price for the year starting in April. The spot market for ore is smaller and most spot comes from India. RIO, RTP, and BHP, provide 75% of the Ore to China, the price cut is based on expected lack of demand, do you think the miners will agree to a cut and then ship more? This "Soaring BDI" is merely drifting back to break even levels. Panamax rates have finally reached $5000, EXM states that expenses for a Pana are $4300 per day not including financing. So the ships just dropped anchor.
When these companies ships come off charters and reset, there will be a tremendous hit to earnings and forecasts. Traders can trade, but investors might wait to see what happens when earnings are announced. brs-paris.com provides the ship orders and expected delivery.

Feb 02 06:13 PM

[my_pseudonym:]

My take.... Oil contango increased demand for ships to store excess oil resulting in overall increase in freight rates.

Feb 02 06:54 PM

[ramisle:]

Oil is not stored on Dry Bulk ships.
Oil tankers do not make up the BDI index.
The BDI does not act in sympathy with Tanker rates, it is an actual indicator of rates paid for Bulk only.

Feb 02 08:37 PM

[ramisle:]

In Oct, 2007 the BDI was over 11,000 it dropped to 5,600 in Jan.2008, and then rose to over 11,000 again by May, 2008. That action was directly attributed to the contentious Iron Ore negotiations between China and the miners. China was posturing, saying it would shut down Steel Mills, and even announced a massive discovery of new Ore, Chinese Ore is poor quality, less than 40% FE. The Miners in turn declared force majeure, they would not be able to fulfill contracts due to railroad tracks that were destroyed by flooding.
These disruptions caused a huge swing in the BDI which was not a reflection of the overall economy.

Feb 02 10:28 PM

[Paul Killinger:]

Jegan,

The metals experts believe copper will go to $15 in future years. By way of comparison, gold would need to climb to $9,000 (!) to match such a gain.

Feb 04 10:39 AM