Every work day since 1985,* ship traders and brokers alike have looked to a set of indices provided by the Baltic Exchange in London to get a feeling for where the market is moving and how to conduct their business accordingly. The central indicator among the bulk carrier indices, the Baltic Dry Index or BDI, gained new prominence in the mainstream press in late 2008 as it was frequently cited by economic analysts as the most honest indicator of “real economy” trade flows, linked, as it is, nearly exclusively to the demand side of trade due to the relative inflexibility of the supply side, i.e. total capacity of the world fleet. The world fleet capacity (“supply”) is judged as comparatively inflexible and, thus, unchanged in the short term because at least two years are needed to build a new ship. But few, even the most veteran of shipbrokers, have anything but a superficial understanding of what is behind the BDI and from what it is generated. To correct this lack of understanding is the goal of this guide.
What is the BDI?
The Baltic Exchange’s signature bulk shipping index constitutes a single number, calculated daily, albeit a single number constructed from multiple sources and layers of input, hiding in its simplicity the complexity of the entire bulk carrier market. In efforts to portray the most representative picture of the day’s dry bulk market, the value of the BDI is compiled from broker-provided estimates of prevailing rates on a series of specifically defined trips (for instance the charter rate for a 150,000t cargo on a modern Capesize vessel transiting from Richards Bay to Rotterdam is designated as the C4 route). The Baltic Exchange has defined 29 separate routes standard to the industry (including three test routes that do not contribute to the BDI) covering all four sizes classes – Cape, Panamax, Supramax and Handysize – that are in turn calculated into the four individualized routes of the BCI, BPI, BSI and BHSI.
Where does the information come from?
Where does the Baltic Exchange get its “basket” of broker-provided rate estimates? These daily ratings are provided to the Exchange every day by active shipbroking companies appointed to be a “panellist” for the Baltic Dry Index. Among its prerequisites, the panellists, who send in their rate estimates every day, are required to be (1) companies with their primary activity as shipbroking, (2) recognized as competent, professional firms active in the market and with sufficient staff to maintain the duties of a panellist, (3) members of the Baltic Exchange, (4) adhere to a list of standard terms, (5) be selected as to maintain an “appropriate geographical spread” of panellists, (5) not be exclusive representatives of charterers that have an overly dominant influence in a particular trade route and (6) must nominate a member of the Exchange as responsible for each respective index on which they report.
The BEX routes
Of the Baltic Exchange’s 26 active routes (excluding the three Supramax test routes and the four time charter averages), five are voyage rates and the remaining 21 are time charter rates. All five of the voyages are Capesize rates and denominated as per-tonne values. They are determined by panellists and designated by route. For example, the Baltic’s C4 route – tracking a 150,000t freight on delivery from Richards Bay and redelivery to Rotterdam – is at this writing valued at 9.823 (/t), representing a close match to average rates that have been chartered on that route in recent days. The Cape index, BCI, has by far the most routes, with ten, while the Panamaxes have the fewest with four. Officials at the Baltic Exchange tell BMTI that there are plans to incorporate more voyage rates into the other sizes, though for the time being voyage assessments are calculated for Capesizes only. Lest one think that the Baltic only tracks the spot market, it should be known that the time charter values – starting with the C8 route for a modern 172,000 dwt vessel on a trans-Atlantic trip delivery Gibraltar redelivery Hamburg – are calculated with a combination of both spot and period values. Panellists, according to the Baltic, as “guidance” use both sets of fixtures, simply dividing period deals into an average and incorporating their calculations into their consequent assessments.
The Freight Indices and Futures Committee (FIFC) of the Baltic Exchange is responsible for gathering freight information for the exchange and selecting the routes that contribute to the generation of the BDI. Each route has been selected by the FIFC for geographic balance between both the eastern and western routes as well as the trans-Atlantic and fronthaul routes. Emphasis is also given to keeping a commercial balance between time charter and voyage assessments. After panellist assessments covering each route are compiled daily for the four individual bulk indices using a specific inverse factor to equalize a route’s impact – or multiplier – they are combined with a pre-defined weighting number to produce the day’s value for the BDI.
The calculation of the BEX indices
Looking at the BCI, for example, it employs 10 different route ratings (C2-C5 and C7-C12) to come up with its singular value. Since five of the Cape routes are voyages and the rest are time charter values, it is important to normalize each value with a multiplier to put rates within a reasonably close range and thus create a realistic average. The C2 route covering a Cape freight Tubarao/Rotterdam may have a (per tonne) value of around 10-50 while the C8 covering trans-Atlantic time charters would have a (per day) value in the thousands, e.g. US$ 10-50,000 daily. In order to put the values into a common range, the C2 is pegged with a maximizing multiplier of 27.649, making a C2 of 10 into 276.49. The C8, on the other hand, is minimized with a multiplier of 0.011395, which makes a C8 of 10,000 into 113.95. Now, the two values, 276.49 and 113.95, are in a reasonably close range and can, using multipliers, be averaged into a common value with the other routes into the BCI.
In principle, these index values are then evenly weighted to calculate the BDI according to the following formula which uses another multiplier:
((BCI + BPI + BSI + BHSI)/ 4) * 1.192621362
The multiplier was first applied when the BDI replaced its predecessor, the BFI in late 1999, to enable a smooth transition and has since been changed several times as the other indices were modified. For the BCI, BPI and BHSI the respective index values flow directly into this calculation; however, for the BSI a further multiplier is used which was introduced when the BSI replaced the BHMI for continuity reasons. This means that the BSI index value is first multiplied by 0.095637068.
The BDI is, admittedly, an abstract number lacking a direct link to one single currency or single freight rate, but as the summation of world market movements as a whole, there is perhaps no better way to numerically visualize the day-to-day dry bulk market movements.
* originally known as the Baltic Freight Index or BFI, the Baltic Dry Index replaced it on November 1, 1999.