Vai dal Barbieri: The Baltic Dry Index as a compass to navigate costs

In my day-to-day work analyzing key economic indices, such as the Baltic Dry Index (BDI), I have realized how crucial it is for companies to understand the impact this data can have on their strategies and profitability. The BDI, in particular, is a key indicator, too often underestimated, that monitors fluctuations in the transportation costs of dry commodities, directly affecting sectors such as energy, raw materials and manufacturing.
The BDI, originally conceived in the context of British maritime trade, has evolved its role to become one of the most reliable tools for predicting global economic movements today. When transport costs rise, it is often a sign of global economic recovery; when they fall, companies must be prepared to revise their operational forecasts.
Unlike many other indices, the BDI provides an extremely concrete view of international trade trends because it is based on actual ship and trade route data. In particular, its ability to cover routes connecting major production centers with consumer markets makes it an indispensable tool for anyone operating in sectors dependent on the availability of raw materials.

The roots of the BDI date back to 1744, when merchants and shipowners used to meet at the Virginia and Baltic Coffee House on Threadneedle Street, near the Royal Exchange in London. In those years, London was emerging as the hub of global maritime trade thanks to the expansion of British trade routes. Merchant coffee houses became important centres for communication and maritime affairs. With the weakening of British influence in the American colonies after independence, the commercial focus shifted to the Russian Empire and other emerging markets. Subsequently, the Baltic Exchange became a formal institution and, on 17 January 1900, was incorporated as a private company with limited liability, with shares held by its members.
In 1985, the Baltic Exchange launched the Baltic Freight Index (BFI), the direct precursor to the BDI, which tracked shipping costs for dry goods. In 1999, this index was restructured and renamed the Baltic Dry Index, introducing a more sophisticated calculation methodology that better reflected global shipping dynamics. In November 2016, the Baltic Exchange was acquired by the Singapore Exchange (SGX), but retained its headquarters in London.

Today, the BDI measures transport costs on more than twenty international routes on a daily basis, weighting the rates of three main categories of cargo ships: Capesize, Panamax and Supramax. This breakdown accounts for a significant share of the overall index, with Capesize ships accounting for about 40 per cent, while Panamax and Supramax contribute 30 per cent each, respectively. The accuracy and granularity of the BDI derives precisely from this diversification of ship categories, each with specific characteristics that determine their use in different commercial contexts.
Capesize ships, for example, are among the largest in the world, with a capacity of over 150,000 tonnes. Mainly used to transport coal and iron ore, they are too large to pass through the Panama and Suez canals, forcing them to circumnavigate large capes such as Cape of Good Hope and Cape Horn. These ships are vital for trading strategic raw materials, such as those needed for the steel industry and energy production.
Panamaxes, on the other hand, are designed to pass through the Panama Canal, with a capacity of between 60,000 and 80,000 tonnes. They are often used to transport grain, coal and other agricultural raw materials, travelling intercontinental routes linking major producers to global consumer markets. Finally, the Supramax, with capacities between 50,000 and 60,000 tonnes, are among the most versatile vessels, used for the regional transport of goods such as fertilisers and agricultural products, often on more complex or less accessible routes.
The BDI calculation is based on daily assessments provided by shipping brokers, who report charter rates for different routes. This information is then aggregated and weighted to obtain a representative average value of overall transport costs. The routes covered by the BDI include some of the major international trade flows, including routes from Australia to Asia for the transport of coal and iron ore, from Brazil to China for iron ore and soybeans, and from Latin America to Europe for grain and other agricultural commodities.
These routes represent the focal points of international commodity trade, such as the route from Australia to Asian markets, which meets the growing demand for coal for power generation in China and Japan. Another crucial example is the route from Brazil to China, which is crucial for China's steel industry, which relies almost exclusively on iron ore imports.

However, the BDI is not immune to volatility. Small changes in the demand or supply of ships can cause significant fluctuations in charter rates. Many external factors contribute to this volatility, including global trade policies: geopolitical tensions, economic sanctions or trade wars can directly influence trade flows and thus shipping rates. Similarly, environmental regulations are becoming increasingly influential. Stricter regulations on sulphur emissions, for example, force shipping companies to invest in cleaner technologies, increasing operating costs and affecting rates. Finally, fluctuations in commodity prices directly influence the demand for shipping: an increase in prices can stimulate production and transport demand, while a drop in prices can lead to a reduction in shipments.

Besides the BDI, there are other indices that provide valuable information on maritime trade. Drewry's World Container Index (WCI), for example, measures container transport costs on specific routes. Published weekly, the WCI provides a clear indication of the cost of shipping 40-foot containers on eight major global trade routes, including flows between Asia and Europe, and between Asia and North America. During the COVID-19 pandemic, the WCI saw a significant increase, with charter rates reaching record levels due to congestion at ports and a sudden imbalance between supply and demand.
Another notable index is the Harpex Shipping Index, which measures charter rates of container ships. Unlike the BDI, which focuses on the transport of dry commodities, the Harpex focuses exclusively on containers, reflecting the dynamics of trade in packaged and semi-finished goods. The Harpex Index also follows global economic cycles, with increases during periods of economic expansion, when demand for transport increases, and decreases during downturns or low activity.

In conclusion, while the BDI remains one of the most important indicators for monitoring dry bulk shipping, indices such as Drewry's World Container Index and the Harpex Shipping Index offer a complementary view of the demand for containerised transport, which is essential for the finished goods trade. Together, these indices provide a comprehensive picture of global maritime trade trends, enabling industry participants, investors and policy makers to make informed decisions based on reliable and timely data.