Decades-old freight index gets revamp as investor interest grows

The Baltic Dry Index, a decades-old measure of shipping costs viewed by some investors as a leading economic indicator, is getting a makeover.

The measure will now get its heaviest weighting from giant Capesize ships that haul iron ore and coal, while the smallest Handysize carriers are removed altogether. The alterations follow interest from exchange traded funds and family offices about the creation of a global freight benchmark in which they could invest, said Stefan Albertijn, Chair of the Baltic Index Council.

"Over the years there has been considerable interest from the commodity and financial community in trading the BDI,” said Albertijn, who also runs Antwerp-based shipping company Ocean Finance & Consultancy. “We’re excited by the prospect of exchange-traded funds based on the BDI.”

Known in the industry as the BDI, the Baltic Exchange-published index sometimes captures early demand surges for industrial commodities that in turn point to economic expansions. While that can make the measure appealing to investors, its usefulness as a leading indicator has fast diminished in periods when fleet expansions flood the market with vessels, thereby making rates unresponsive to increased cargo buying.

The latest shift is designed to address the fact that there’s not enough derivatives trading of Handysize rates for financial institutions to create the necessary hedges of the over-arching BDI, Albertijn said. By eliminating those smaller vessels, the BDI will now reflect charter prices where there are appropriate underlying derivatives markets, he said.

The Baltic Dry, whose origins stretch back more than three decades, has been a composite of rates for different moving commodities, which until now has been equally weighted across four ship types: Capesizes, Panamaxes, Supramaxes and Handysizes. Now, the biggest carriers will represent 40 percent of the measure while Panamaxes and Supramaxes will account for 30 percent each.

There will be an annual review of the vessel types that constitute the Baltic Dry, and tests showed a 99 percent correlation between the reweighted measure and the old one, according to Albertijn. The Baltic Exchange will continue to publish rates for Handysizes. (Bloomberg)