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..