Why you should care about the Baltic Dry Index.

Commentary about business and finance.
Oct. 24 2003 5:11 PM

The Shipping News

The best economic indicator you've never heard of.

Baltic Dry Index: Not a Latvian deodorant
Baltic Dry Index: Not a Latvian deodorant

The leading economic indicators—which serve as the foundation of massively important political and economic decisions—can frustrate even the wisest economists. They quibble over whether the payroll or establishment employment numbers make more sense and wonder whether consumer confidence figures measure anything more than sentiment. The figures of the gross national product are consistently revised.

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As part of a new (extremely modest) effort to bring clarity to the bewildering maze that is the global economy, Moneybox is launching a search for obscure economic indicators. While less followed and hyped than their more famous brethren, OEIs may nonetheless provide insight into certain sectors of the U.S. and global economies. This column will be the first in an occasional series about these odd but helpful numbers.

Today's OEI: the Baltic Dry Index.

Baltic Dry isn't a Latvian deodorant or an Estonian cocktail. Rather, it's a number issued daily by the London-based Baltic Exchange, which traces its roots to the Virginia and Baltick coffeehouse in London's financial district in 1744.

Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes—150,000 tons of iron ore going from Australia to China or 150,000 tons of coal from South Africa to Taiwan. Brokers are also asked to consider variables such as the type and speed of the ship and the length of the voyage.

The answers are melded into the BDI, which appears in shipping publications such as Lloyd's List and on the screens of information vendors such as Reuters and Bloomberg. Because it provides "an assessment of the price of moving the major raw materials by sea," as the Baltic puts it, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade.

The BDI is a good leading indicator for economic growth and production. After all, it doesn't deal with container ships carrying finished goods. It deals with the precursors to production: bulk carriers carrying building materials, cement, grain, coal, and iron. Unlike stock and bond markets, the BDI "is totally devoid of speculative content," says Howard Simons, an economist and columnist at TheStreet.com. People don't book freighters unless they have cargo to move.

Because the supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the Arizona desert—marginal increases in demand can push the index higher quickly. And significant increases in demand can push the index sharply higher. That's precisely what happened earlier this fall. As  this chart  shows, the Baltic Index doubled in September and October—an unprecedented jump.

Does this chart represent a Nasdaq-style bubble or a demand-led structural change? The summer did see a pick-up in coal and grain shipments to Europe, due to the heat wave, and China's humming steel factories are consuming massive quantities of iron ore. Those could be blips. "But it's not just iron ore and coal," says Michael McClure, vice president of Navios, a ship broker. "The strength can be seen among all the major commodities that ocean freight is carrying."

The real force behind the BDI's rise may be China. "To put it in extremely simplistic terms, China is importing huge amounts of raw materials and exporting manufactured goods, and that's drawing ships into the Pacific," says Jim Buckley, chief executive of the Baltic Exchange. The Wall Street Journal led today's "Money and Investing" section with an article on China's insatiable demand for raw materials. The Baltic index divined this trend several weeks ago.

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