Steer Clear of Shipping's Baltic Dry Index

In finance, be cautious of anyone who uses historical correlation to back up their argument. In shipping, just flat out run from them. Shipping's notorious Baltic Dry Index, which is an index of spot rates for shipping dry bulk commodities such as coal and iron ore around the world, achieved death-defying heights and then, well, death-causing lows, in the course of 2008, falling 90% from its peak, and attracted a lot of attention in the process both on the way up and down.

The BDI meme is still alive, especially given a recent rally, and we have quite a few people claiming it as a quality indicator, or even the best indicator (sheesh) for the direction of stock markets or the world economy. Unfortunately, a lot of smart people misunderstand what the BDI represents.

Not a Reliable Leading Indicator - The BDI

Comments

[nobby73:]

Was the bottom of this article omitted by mistake?

Whilst I think the recent rally in the BDI doesn't tell you much more than that shippers need to at least break even. Short term trends in the BDI can be very misleading - need to know things like waiting times to unload cargo at ports. However, the BDI works on a cycle of 10 yrs or more and is an excellent indicator of long term trends. When I first looked at this, what I found fascinating was how the shipping rates for say Brazil to China were multiples higher than for the return trip. You had dry bulk moving to China and then finished goods returning in container ships.

I believe that if this is to be China's century, the BDI will be a much more important indicator of China's economic health (although maybe rebased in Yuan) than it has previously been of the US, given the shortage of bulk materials (coking coal and iron ore) vital for China's economic growth. I am highly confident the BDI will be significantly higher in 5 yrs time than it is now, unfortunately, I can't take a position on the index.

May 18 06:07 AM

[da_cheif:]

>unfortunately I can't take a position on the index<....yes you can.....pure china commodity play....GFRE

May 18 08:51 AM

[manya05:]

> Unfortunately, a lot of smart people misunderstand what the BDI represents.


OK.....will you expand? for those of us that are not that smart?

May 18 09:28 AM

[User 385523:]

The remainder of the article can be found by clicking the the link to the author's website.

May 18 11:14 AM

[User 385523:]

Yes, click the link to the author's website and the bottom half of the article is available.


On May 18 06:07 AM nobby73 wrote:

> Was the bottom of this article omitted by mistake?
>
> Whilst I think the recent rally in the BDI doesn't tell you much
> more than that shippers need to at least break even. Short term
> trends in the BDI can be very misleading - need to know things like
> waiting times to unload cargo at ports. However, the BDI works on
> a cycle of 10 yrs or more and is an excellent indicator of long term
> trends. When I first looked at this, what I found fascinating was
> how the shipping rates for say Brazil to China were multiples higher
> than for the return trip. You had dry bulk moving to China and then
> finished goods returning in container ships.
>
> I believe that if this is to be China's century, the BDI will be
> a much more important indicator of China's economic health (although
> maybe rebased in Yuan) than it has previously been of the US, given
> the shortage of bulk materials (coking coal and iron ore) vital for
> China's economic growth. I am highly confident the BDI will be significantly
> higher in 5 yrs time than it is now, unfortunately, I can't take
> a position on the index.

May 18 11:15 AM

[Jeff G.:]

The link just leads one back here.


On May 18 11:14 AM User 385523 wrote:

> The remainder of the article can be found by clicking the the link
> to the author's website.

May 18 12:59 PM

[Vincent Fer...:]

Yes they missed the bottom, largest part of the article. Please go to researchreloaded.com for the full article. And please add my RSS if you like it.

May 18 02:10 PM

[flyingdutchman:]

Some folks are using the BDI for a weather vane on the state of the world economy.
The last jump up is reported as being meaningful for a positive outlook.
I read an article that mentioned that shippers are anchoring their vessels in and around the port of Singapore in numbers not seen for thirty years.Hundreds estimated , just sitting around. Which may explain the jump in the index as pertaining to loaded vessels.
The shippers have reduced the fleet to maintain efficiencies.

May 18 02:23 PM

[notsosmart:]

maybe an anchorage index would help.loaded or empty would enhance this info.

May 18 04:57 PM

[Wiskey:]

This article lacks any sense. From it's title to the internal part.
Please answer:
1. Why we should steer clear of BDI?
2. Why should we be cautious to one who uses BDI for historical correlation to back up their argument?
3. Same for shipping.
4. Why you want to write just few unrelated statements and post it on SA?

Is it all because BDI felt 90% from its peak?

5. If you are a smart person, please give us an explanation what BDI represents.

May 18 04:57 PM

[Vincent Fer...:]

Wiskey. Seeking Alpha by accident forgot to show my entire article, and changed my title as well. Go see the entire article at researchreloaded.com/c...

Flying Dutchman. Ships in Singapore generally have little to do with dry bulk, which the BDI measures. Singapore is a container shipping hub which is completely different subject, subject to different demand factors and with a rate trends completely independent of where dry bulk rates go. Please check my entire article via the link above to understand why movements in the BDI aren't reliable for telling us much about where the economy is heading.

May 18 09:55 PM

[Mad Hedge F...:]

Wrong move. If you are not a captain on a bridge somewhere, ready with orders to repel boarding pirates with fire hoses, you might be forgiven for being unaware that the Baltic Dry Shipping Index ($BDI) has gone up an unbelievable 20 days in a row. This market for bulk cargo charter rates made investors seasick last year when the near complete shutdown of international trade and a cessation of credit took the index down a mind boggling 94%, from 12,000 to 650. At that level, the market was pricing in a probability that no ship would ever sail anywhere again, and that the global fleet would permanently rust at anchor. A slow thawing of credit has drawn in some hot money that has taken the BDI back up to 3,400, a handy 560% gain in six months. It has also been matching the revival of commodity markets tick for tick. The chart below looks like crude with a turbocharger. In additional to being a favorite topic to impress friends with at dinner parties, the BDI has also become a favorite of the “green shoots” crowd as proof that the world is not going to end after all. After so many things have had great runs, there are a lot of charts that look like this now (Crude, FXI, etc.). This one is just the most extreme.

May 29 07:31 PM

[Vincent Fer...:]

Hi Mad, the BDI wasn't pricing in the chances that ships would rust at anchor, as explained in my piece, its just a spot index for rates today. Seeking Alpha cut off my article, read the full piece at my site.

Jun 01 01:59 AM