Just like me (and am sure many others), Shome Moitra a Business Development | Strategy | Consultative Sales Professional is also surprised and amazed at how disconnected the maritime, shipping and freight industry is to rest of the world especially since everything we use has a connection to this industry..
Shome wrote this piece about BDI in an attempt to break the seemingly tenacious mainstream understanding of Baltic Dry Index (BDI)..
First things first – What is BALTIC DRY INDEX (BDI)..??
- BDI is NOT a stock market index like FTSE, Hang Seng, Nikkei, Shanghai Composite or DAX. Its more like the plain vanilla Average (primary school math anyone?) of “freight rates” collected from people running the ships across the globe (more on that later)
- There are different kind of ships transporting cargo everyday. BDI Covers only the ships carrying DRY CARGO (and NOT oil, gas, chemicals or containers). There are different Indices for Tankers (Oil cargo) and Containers (Remember the Tom Hanks starrer Captain Philips?) but for the sake of sanity lets not go there right now.
- BDI is compiled daily and quoted at 1300 London time (Monday to Friday) by the pretty awesome guys at The Baltic Exchange www.balticexchange.com – which again is NOT a derivatives exchange like NASDAQ, EUREX or CME Group. I call them awesome because they do a rigorous work of calling a bunch of people everyday to compile the index (in case you mentioned your job was monotonous, think again)
Now that the myths of BDI not being a stock market equivalent is broken, lets look at the specifics of how it is calculated.
Few fun facts to get acquainted to before we jump right in
Among the dry ships carrying cargoes like metal ores, coal, steel products, forest products, and grains, there are FOUR major types of ships (for the context of BDI) classified on the basis of their total cargo capacity, they are –
Although there are numerous ports and shipping routes through which ships travel to transfer cargo from point A to point B, for calculating BDI only 22 major shipping routes are considered. An example of these major shipping routes are –
- Tubarao (Brazil) to Rotterdam (Netherlands)
- Tubarao (Brazil) to Qingdao (China)
- Richards Bay (S. Africa) to Rotterdam (Netherlands)
- W Australia to Qingdao (China)
- Bolivar (Colombia) to Rotterdam (Netherlands)
- Gibraltar-Hamburg Transatlantic Round Voyage
- Continent/Mediterranean trip Far East
the detailed list of major shipping routes that are used to compile BDI can be found here
The awesome Baltic Exchange guys I mentioned before call major ship brokers across London, New York, Singapore, Tokyo, Shanghai, Beijing, Mumbai, Oslo, Athens, Hong Kong, Geneva, Delhi and Genoa to check how much they “fixed” or contracted a particular ship across these 22 major routes on that day. The rate at which ships are fixed is called Time Charter Equivalent (TCE). TCE is nothing but voyage revenues, subtracting voyage expense and then dividing the entire total by the round-trip voyage duration in days.
Lets say a ship (MV Dummy) capable of transporting iron ore from Brazil to China was fixed for $100 a day. Lets assume the daily cost to run MV Dummy (fuel, crew salaries, machinery maintenance, port and agency costs, other costs) is $ 70 and the round trip from Brazil to China takes a total of 30 calendar days. So MV Dummy’s TCE is (((100 – 70) x 30)/ 30) = $30
Simple right? Now lets bring back the four different types of ships what we saw based on the total cargo carrying capacity. And associate a daily average TCE for each ship type (total TCE across all ships/ total number of ships) and lets put cool names to them like HandyTCavg, PanaTCavg, SupraTCavg & CapeTCavg. That’s it we are almost there… And for the final step lets work out a simple equation –
(CapeTCavg + PanaTCavg+ SupraTCavg + HandyTCavg)/ 4) X 0.110345333
There you have it. Congratulations! you have successfully calculated BDI. Its that simple – no fuzzy stock quotes, no enterprise values and no complex equity/debt calculations.
Why do we need to calculate BDI you ask? Here are a few reasons among others for starters –
- This index is one of the purest leading indicators of global economic activity. It measures the demand to move raw materials and precursors to global production sites.
- Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real-time glimpse at global raw material and infrastructure demand.
- Some economic indicators—like unemployment rates, inflation indexes and oil prices—can be difficult to interpret because they can be manipulated or influenced by governments, speculators and other key players. The Baltic Dry Index, on the other hand, is difficult to manipulate because it is driven by clear forces of supply and demand.
- The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. It is difficult to manipulate or distort this supply because it takes years to build a new ship that could be put into service to increase supply, and it would cost far too much to leave ships empty in an attempt to decrease supply.
- The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. It is difficult to manipulate or distort demand because it is calculated solely by those who have placed orders to have raw goods shipped. Nobody is going to pay to book a Capemax cargo ship who isn’t actually going to use it.
- Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
So there we have it – BDI in fact is one of the most closely followed indices among others for almost all stakeholders associated in the maritime trade. Unfortunately BDI is at its historical lowest at the time of writing this post.
Trust this post helped you to understand Baltic Dry Index and how it works..
So what do we do with the BDI number for instance 4,000 as of today, to find out how much it costs to transport coal for instance on a cape from Brazil to Rotterdam? Does anyone know? And what is that divisor about .11etc…..
a. What are the main drivers for peaking up BDI during the first semester of 2019?
b. What are the main factors that affected BDI during the second half of 2019?
c. What do you believe about the Tanker market? How BDI affected the Tanker Indices in 2019
The basic explanation is quite good but there is some naivety in the comment that it is difficult to manipulate, and that it relies on member companies: are all players member companies? Possibly not. And where producers or buyers have their own fleet on long term tc the BDI has no relevance.
I am in the industry and understand the BDI (composite of all 4 timecharter indices) but I don’t know where the multiplicator of 0.11034533 comes from ?? thanks Hans in Montreal
what is one point equal to a dollar ?
How to convert?
Thanks for such a wonderful article . BDI gives us the idea about DRY CARGO , however I would like to know if there is any index which monitors the Freight charges for Containerized ships. I found few like CCFI , SFI – but these are limited for exports from China. Just curios if there is any authentic index which we can refer to .
Thanks and look forward to your reply.
Hello, thanks for this very nice article! Do you by any chance have any idea how did they come up with this constant number: 0.110345333 ?
Nice article once again.Everytime I come here I learn new stuff. Nice to know so basically its all one bidding war!
Very informative and appreciated. I’m wondering why (according to the table) the BDI is lower the Capemax than it it is for Panamax and Supramax but higher than for the Handysize. I would think that Capemax would be higher than the other 3 ships given the efficiencies of scale. Also, it wasn’t clear to me as to how the BDI is used. Is is strictly for bid and budget calculations by carriers and shippers?
Hello Mark.. Its all a question of supply and demand.. Right now due to the depressed markets, Capes are not doing so well.. Even though there may be efficiencies of scale, the trading volume is quite low due to the collapse in commodity prices and the regular markets (mainly China) is not buying as much as they used to.. Companies are buying in smaller quantities as per their need and not to stock pile/trade.. Everyone is watching the commodity prices nervously..
For example as of Monday 14th March, in terms of average spot TC rates, daily earnings for Capesize vessels fell $46 to $2,172 per day, while both Panamax and Supramax rates rose to $3,827 per day and $4,391 per day, respectively..
The BDI is a useful indicator in global trade which tells you how much it costs to move dry bulk cargo around the world..
Trust this assists..
Every time I think my job is getting boring all I need to do is read articles from this blog/website and I understand how much more there is to it and how interesting it actually is!
Thank you Mr. Manaadiar you are a true life saver 🙂
🙂 Glad you feel that way Tom.. It really is interesting and trust me, there is lots and lots more in this industry..
This is a very good article and gives a over view of what is BDI
Hariesh, how reliable are market assessments and arent they susceptible to being rigged. I mean a cartel of vessel owners can always overstate tce by 15% and a cartel of charterers can always understate the tce.
Hello Param, cartel activities are there and will continue in all businesses including shipping.. Recently RO-RO and freight forwarder cartels were fined for price-fixing.. So, yes where cartels operate, it is possible that the market and indices maybe manipulated..
That was a very informative article on BDI. …. Thank you very much, Mr. Shome Moitra!