The three month moving average (3MMA), of the Baltic Dry Index (BDI), for July was 914 down 10.5%, 3MMA month on month (m/m), but up 41.5%, 3MMA year on year, (y/y). The BDI has corrected since peaking above 1,300 points in the spring rally. Despite this correction, shipbrokers remain positive that the market will improve I the near-term.
The BDI is a shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials. The Baltic Dry Index offers a forward view into global supply and demand trends. A rising index can indicate a strengthening global economy. A contracting BDI index signals a slow-down.
The BDI includes three component ships: Capesizes, Panamaxes and Supramaxes. Capesize ships are the largest at >100,000 dead weight tons, (DWT). Capesize vessels make up 10% of the world fleet but account for 62% of dry bulk traffic. Panamaxes account for the vast majority of steel and its raw material freight, they weight in the range of between 60,000 to 80,000 DWT. Panamaxes account for 19% the world fleet and 20% of dry bulk traffic. Supramaxes (35,000 to 59,000 DWT), make-up 37% of the world fleet and combined with the smallest Handyman vessels (15,000 to 35,000 DWT), which account for 34% of the world fleet tally the remaining 18% of dry bulk traffic. Handymaxs are not counted in the BDI index.
Figure 1 shows the 3MMA for both Capsize and Panamax indexes. These volatile indexes both rolled back a bit of late, but have been trending higher since early 2016. Despite the recent rise, the BDI is still quite low by historic comparison. The July Capsize (BCI), 3MMA was down 22.2%, but was up 39.8% y/y. The July Panamax (CPI), 3MMA was off 9.3%, but up 55.9% y/y.
The BDI is not as good a predictor of global economic strength as it once was. The BDIs ability of the BDI to predict economic movement was damaged as a result of an oversupply situation. Too many ships were built during the peak of the last economic cycle under the assumption that economic growth would continue unabated. Many of these ships were brought into service after the economy collapsed creating an excess condition. Lower prices will most likely be the new norm for the BDI. Global demand is currently fairly strong, yet the BDI is hovering in the 900 point range. In order for the BDI to rise, the oversupply of ships needs to be worked off and that will take a long time.
At Gerdau we regularly monitor the Baltic Dry index since it is a leading indicator of demand for goods on a global scale. An increasing BDI signals stronger global trade which can be good for domestic business if the transactions are fairly traded.