The Baltic Dry Index (BDY) as of May 2016 is at 652 more than double from levels of 293 seen in February 2016. The index tracks global shipping activity of raw materials such as coal, iron ore, steel and cement . BDY index is a leading indicator of trade activity and business sentiment, hence it is important to track its movements. Let us understand the index.
Baltic exchange publishes BDY index data daily, on the basis of pricing data collected from the large dry bulk shippers worldwide for more than 20 shipping routes globally. It is an average of 4 different indices namely the Baltic Handysize Index, the Baltic Capesize Index, the Baltic Panamax Index, the Baltic Supramax index. Handy size (goods carrying capacity upto 3500DWT (dead weight tonnes)), Capemax (upto 100000 DWT), Panamax (upto 80000 DWT), Supramax (upto 60000 DWT) are types of ships.
BDY index is based on changes in demand supply factors, and is an efficient way to quantify and measure the strength or weakness in the global demand for commodities and raw materials. As it is a real time indicator, the index is hard to manipulate. It can be a good leading macroeconomic indicator as it tracks large quantities of shipped raw material.
Baltic Dry Index is affected by the number of ships available to transport raw materials globally. Typically the number of ships cannot be easily manipulated or disrupted as ships usually take years to build and once built it is expensive to keep them inactive.
The Baltic Dry Index is affected by the demand of commodity consumers who need the raw goods for production. Producers buy raw materials, commodities, when they begin work on heavy machinery, roads, large infrastructure projects and other finished goods . Producers skip buying raw materials when they pause work on infrastructure projects or have huge pile up of unused inventory.
Chart 1 shows that BDY index bottomed in early February 2016. It had peaked around 11000 in the 2006-08 period when commodity prices were very high. In the last couple of years BDY index movement correctly reflected weakness in the demand for commodities. The trend has reversed slightly from February 2016 onwards indicating an uptrend in global demand for commodities. If the upward trend continues further for s longer period then the indicator can be read as an upswing in global growth. It is too early to predict a global growth recovery but it may just be the beginning of an upward movement in global growth.