The Baltic Dry Index, a shipping freight-cost index, has been recording noteworthy growth in the last couple of weeks, closing to 2,000 points as of 17 October. In this brief overview, we’ll try to understand why this is happening.
First of all, the Baltic Dry Index, BDI for short, is a shipping freight-cost index issued daily on the London-based Baltic Exchange. It is used around the world as a proxy for dry bulk shipping stocks, as well as the general shipping market sentiment. Some would argue that it can also be used as an indicator of future economic activity. This is due to the fact that demand for shipping, and especially shipping of this size usually means two things: there is either a demand for commodities that get transported, or there is a limited number of ships available. For example, when the world’s economies started reopening in 2021 after the pandemic subsided, there was a massive increase in shipping costs, as many ships were also stuck in ports around the world, especially China.
This is when the index managed to reach its all-time high of 5,650 points back in October 2021. To put things into perspective, the 5-year average (starting from today and going backward) stood at 1,705 points, while the 10-year average stood at 1,361 points. This would mean that during that period, shipping costs were 231%, and 315% more expensive than those averages. Of course, huge disruptions across the world tend to cause things such as these.
A second example is the Russian invasion of Ukraine, after which the BDI jumped to 3,369 points, again almost 2x, and 2.5x higher than the 5-year and 10-year average, respectively. It has to be noted that the index is very much affected by not only the geopolitical and macroeconomic swings but also overall supply and demand. As such, short-term increases/decreases do tend to happen, as we can see in the graph below.
BDI index (2013 – 2023 YTD, points)
Source: Bloomberg, InterCapital Research
The latest conflict spot, the Israeli-Hamas conflict, also has the potential to drive up the shipping costs further. As all the previous conflicts/crises have shown us, this is quite disruptive. The whole situation, however, is quite complicated. Israel itself is not a large shipping country, nor does it export that many commodities, especially dry bulk commodities. Why the situation itself is delicate is the possible escalation involving other Middle Eastern countries, especially Iran. If this were to happen, Suez, and especially the Straits of Hormuz could be threatened, and given the amount of shipping that passes both of these on a daily basis, it would certainly have an effect of higher costs at the very least.
Of course, as we can see from the graph, the BDI has been increasing well before the start of the conflict. There are many reasons for this, mostly tied to the War in Ukraine, the better-than-expected economic data from the US, the historically low water levels in the Panama Canal, etc. As such, this conflict could be seen as a potential spark to increase the cost further, and by extension, fuel further inflationary growth as has happened in 2021 after the reopening of the economies (albeit again, for different reasons this time!). The BDI index currently stands at 1,972 points, representing a 30% growth YTD, and a 8% increase YoY. This also represents a level that is 16% and 45% higher than the 5-year and 10-year averages, respectively.