by Alan Cordova

We've gotten some listener questions about a relatively obscure indicator, the Baltic Dry Index. Its precipitous fall has eclipsed that of most other indices: nearly 95% in six months. What is this number and why has it plummeted?

 

Although the Baltic Dry Index is not known for its stability, its unprecedented plunge has indeed worried many economists. The BDI provides a baseline measurement for the cost of shipping raw materials around the world. If the cost of sending copper from Bolivia to Canada rises while the price of sending coal the other way falls by a similar amount, the index should not move. The increase and the decrease cancel each other out.

The index is compiled by brokers at the Baltic Exchange in London who call shipping companies and price out various routes. The BDI is affected by everything from changing consumer demand and investor confidence to political squabbles and national holidays.

Analysts use the number to forecast the profit margins of exporting companies. In addition, the Baltic Exchange lets investors bet on whether the index will rise or fall, by selling them securities. They can use these purchases as insurance against potential losses: for example, if a steel company feared that the cost to ship iron ore would rise, it could buy securities that would pay them if the costs indeed rose.

Just as falling home prices in the U.S. have set off alarm bells, falling shipping prices seem to point to a larger imbalance in global trade. In particular, the current discussion centers around flagging demand from Chinese manufacturers, who have driven up the level of raw material trade (and the BDI) over the past decade. There is great disagreement over the length and depth of the slowdown in the Chinese economy. If China remains in a slump, we could see the BDI similarly depressed.