Ok - here is a disclaimer. I am not a shipping derivatives expert. Having said that I know enuf to make me dangerous.
Anyone feel free to chip in
Ok - one for all you lazy sods - have a shot at answering!
Thanks for the post Tom!
Tom said...
To all who may know the answers...
Excellent - a thread on the BDI. I am currently trying to get into the Shipbroking industry and have a million questions about... well... just about everything! This seems like the ideal time to get a few away about the BDI... I hope they aren't too stupid:
1 - Is there a Baltic Wet Index or a Baltic Container Index? If so, why don't I hear about them?
There are dry and wet indexes. If you were active in the tanker market you would refer to these all the time.
Not sure about containers.
The world loves the BDI - some traders even call it the 'bady'. It has a ring that gets people excited.
2 - BDI is often referred to as a "leading indicator of economic activity". How can it really be that if the index is depressed by the supply of ships, rather than the implied reduction of global demand for raw materials?
Yes you are right. Having said that the supply of ships is also refelcted in the global demand for raw materials. Its a delayed reaction but there is a correlation.
There is no perfect indicator of future economic conditions. The BDI is seen as being excellent because it represents what is actually being shipped at any given period of time. For it to be shipped it must have been bought and sold and for it to be bought and sold it must have been produced.
3 - Why aren't commodity prices themselves not considered a better 'leading indicator of economic activity'? Presumably FFAs influence the BDI in just the same way as futures obscure commodity indices (see next question)?
Commodity prices are based on FOB prices and do not take into account shipping. The difference is that shipping is one further step along the process.
4 - Does the BDI factor in FFA prices?
Yes the BDI is the index.
5 - If so much of Dry Shipping is dependent on China, is the BDI really more of a measure of Chinese economic strength relative to other leading economies?
Yes - China is pulling the strings for the entire world economy.
6 - Are all FFAs priced against the BDI? What about FFA specifically related to Tankers and Containers (I realise the latter are very new)?
Have you checked out the Baltic Exchange website? That will tell you how it all works!
Few points - THE BDI is not a perfect indicator for a few reasons...
1. Doesnt take into account huge supply issues such as port congestion.
2. Can be manipulated through stockpiling and better storage.
3. Is subject to manipulation through trading techniques.
4. Currently heavily dependant on the supply of ships which has nothing to do with current demand (time lag).
I look forward to some kind soul putting me out of my misery.
Thank you VS - Inside Shipbroking was indeed a fantastic start and I regularly visit this site to read your posts and use your news links. Please keep up the good work.
April 28, 2010 5:58 AM
unqte
Hello VS,
ReplyDeleteI was looking at a long term graph of the BDI, stretching from 1985 till today, more or less. What caught my eye (just caught my eye! I did not do any regressions) was the following.
1. From 03/1985 till 03/2003 the index was about 2000 points
2. From 03/2003 it started climbing, in a moderately fashion, but it fell back around 2000 points in 03/2006.
3. Then came the rally up to September 2008 and then we have a nose diving, where, ever since BDI seems again to be roughly about 2000 points.
Therefore, couldn’t we say that the skyrocketing of the BDI was an abnormality, therefore correction of the index was to be expected?
Why worry for the crashed index, instead of recognizing that the market can (probably) support levels of about 2000 points?
Why waiting for the next skyrocketing bonanza, instead of recognizing of the power of gradual growth?