World Wide Recession … is it Over ?… So Says Baltic Dry Index

With the world reeling under global recession, all of a sudden we see spurt in stock market. Many may wonder what drives the stock market. No doubt we have strong liquidity ( huge money ) which drives the market due to the new found confidence in the Indian Govt. But apart from it there are a few factors which influence us : It is the improving Trade situation across the Globe. The world is slowly getting out of recession. To understand this, we need to understand Baltic Dry Index.

What is Baltic Dry Index ?

• The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the Index tracks worldwide international shipping prices of various dry bulk cargoes.



• The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.

What is BDI's relevance to Economies and Stock Market:

Most directly, the index measures the demand (for shipping capacity) versus the supply (of dry bulk carriers). The demand for shipping varies with the amount of cargo that is being traded or moved in various markets (supply and demand).
It takes two years to build a new ship. Unlike airlines, ships are too expensive to take out of circulation : Once pressed into service – they need to continue. So a marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly.

How to read BDI ?

The index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, crude oil, metallic ores, and grains. Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, steel and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.
Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. "People don't book freighters unless they have cargo to move.

How did BDI react in 2008 - 2009 financial crisi

• On 20 May 2008 the index reached its record high level since its introduction in 1985, reaching 11,793 points.


• Half a year later, on 5 December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986.


• By the end of 2008, shipping times had been already increased by reduced speeds to save fuel consumption, but lack of credit meant the reduction of letters of credit, historically required to load cargoes for departure at ports.


• Debt load of future ship construction was also a problem for shipping companies, with several major bankruptcies and implications for shipyards. This, combined with the collapsing price of raw commodities created a perfect storm for the world's marine commerce.


• But with BDI rallying, particularly in the month of May 2009 (see Chart) symbolizes that the worst of the recession could be over. It indicates that the world economies are chugging forward and are on the path of recovery.


• BDI directly benefits Shipping industry in particular and logistic industry in general. But otherwise, the overall sentiment of the world economy is also reflected by this simple index.