The Baltic Dry Index is an index which is released daily by the Baltic Exchanges based in London, United Kingdom. The index provides shippers with an abasement of the price moving various raw commodities across 23 shipping routes worldwide. The price of the Baltic Dry Index is used to price many kinds of shipping contracts, much like how the LIBOR & LME prices are used to price various contracts. The Index figure is released everyday at 1pm GMT and the value of the index is reported widely in the financial media. The information can be found for free on the Bloomberg Website.
The Index has become widely followed in the financial world while most directly the index measures the demand for dry bulk shipping versus the global capacity for such shipping. But the Index is considered one of the best indicators of global economic activity. As the movement of raw materials is vital to precursor to production. The Index gives a real time look at the demand for raw materials. While it can be argued that such real time demand can be inferred by looking at commodity prices, their are number of things pollute the data. Futures contracts, speculation and hedging all play a role in setting commodity prices and may not reflect the real demand for the underlying commodity. The Baltic Dry Index, is traded on the Baltic Exchange which is only open to member companies, leading to significantly less speculation with only limited hedging activity occurring (different member companies take a different approach to hedging, some hedge significantly and while others minimally).
The price of the Baltic Dry Index can also be used as an indicator of potential inflation and cost increases for businesses. A rise in the price of the Baltic Dry Index gets passed along to producers who then pass these price rises onto retail businesses and eventually to the end consumer. The Baltic Dry Index only plays a limited role in this regard, as their are numerous factors at play when it comes to price levels in the general economy. Though some companies are effected more than others, as some companies rely more on globally shipped raw materials than others. If these cost increases aren’t passed along to consumers then margins will decrease.
While the Baltic Dry Index is a very useful tool for determining global demand. There are several other factors not related to demand for dry shipping that can effect the price of the Baltic Dry Index. So when making decisions on the basis of the price of the Baltic Dry Index, try and determine what other factors could possibly be at play. One possibly way to do this would be to monitor the news surrounding the Baltic Dry Index which can also be found on Bloomberg.
There are numerous dry bulk shipping companies listed both in the US and elsewhere. When investing in or trading these companies, your investment or position will be very highly correlated with the price of the Baltic Dry Index. Though as previously mentioned different dry shipping companies take different approaches to hedging, so the degree particular companies performance will be correlated with index varies.