Understanding the Baltic Freight Index – Ocean Freight

Baltic Exchange based in London has created the Baltic Freight Index stands for shipping and trade index. Globally people in cross border trade use it as a measure of the cost of transporting various raw materials. The Baltic Exchange contacts the shipping companies, brokers directly for assessing price levels for a specific route, product, time and speed and a scientific aggregation of the same reflects in the Baltic Freight Index

The Baltic Freight Index is a combination of three sub-indices which seek to measure different sizes of merchant ships or dry bulk carriers, namely.

a) Capesize: these are the largest among all three in the BFI with the deadweight tonnage (DWT) of 100,000 or more. They basically transport coal and iron ore

b) Panamax: these are second in number and have a DWT of 60,000 to 80,000. They are used to transport coal, grains, sugar, cement etc.

c) Supramax: these are the smallest of all the ships with a capacity below 59,999 DWT. These have special loading and unloading equipment.

For decades the Baltic Dry Index (BDI) has been seen as a proxy of global supply and demand for staple commodities around the world. Loose raw materials like coal, steel, grain and minerals need huge ships to carry them across the world’s oceans from supplier to where the demand is.

GLOBAL TRADE’S BAROMETER

Baltic Dry Index (BDI) has become an important economic indicator, a quick and easy way of taking estimating the intrinsic nature of the global economy by measuring the cost of dry bulk cargo ships.
However naysayers at times question its relevance. This is largely because as global trade increases cargo ships are getting much bigger. They carry far more stuff but take longer to build, creating a lag between shipping demand and supply.

This entails a shortage of available cargo ships when demand for commodities rallies, forcing shipping prices higher and faster than the underlying trend.
And it works in reverse, as commodities demand falls, the world is left with a glut of shipping capacity, worsening the slump in cargo ships prices. Therein one gets to see negative Ocean Freight rates

Despite this nuances, Baltic Dry Index (BDI) is still watched closely by investors and economists and people in the trade looking for a grip on world trade and its wider impact