The Baltic Dry Index
The Baltic Dry Index measures the cost of major raw materials that are transported by sea in the global economy. Indicating a strict demand-and-supply price situation, the lower the cost to move goods by ship, the lower the amount of goods to ship.
The Baltic Exchange Dry Bulk Index (or BDIY) is a composite of rates for different ship sizes. It factors in the average daily earnings of Capesize, Panamax, Supramax, and Handysize dry bulk transport vessels. Shipping rates have surged, with most vessel classes recording rate increases and brighter expectations for the coming months.
According to data from Clarkson’s derivatives brokerage, Capseize rates are estimated at $21,789 in 2014. This is 53% more than last year, and $28,000 in 2015.
How the Baltic Dry Tanker Index performs—especially its year-over-year growth—is one factor that has significant implications for companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) as well as the Guggenheim Shipping ETF (SEA).
Similar to last year’s trend in August 2013, the Baltic Dry Index surged in the first two weeks of August 2014. It was driven by an increase in iron ore production and exports from Australia and Brazil.
Last year, the Baltic Dry Index took off due to an increase in demand for cheap coal and iron ore. Analysts believe the same trend may be happening again. As the daily rate increases, dry bulk shippers are expected to come off contract and move to the more volatile and rewarding daily rate.
Meanwhile, Brazil is planning to double its ore output over the next five years. Miners are forecasting increases in production, which will bode well for shippers and increase the volume of dry bulk shipments. Similar to ships, these are big, long-lead-time projects that can’t be easily turned. They require a lot of room. If miners are committed to increasing production, this would be a positive signal to the dry bulk shipping industry.