Friday, January 15, 2016

Baltic Dry Index -- what it is and what it does

Historically, the BDI has been one of the best measure of global trade growth or contraction.  Its an index with few problem because if the number of ships increases then the index may fall despite trade growing -- which is what happened in in the early 00.

The BDI is a measure of bulk shipping -- we are talking steel, minerals and other bulky items that are not moved by containers.  The BDI peaked at 10,000 in 2007 but also fell to near 600 in 2008 -- a function of the economic crisis -- Now for many economists, like myself it was a useful tool to ascertain economic health of economies, such as that of Canada, which are primarily dependent on the export or raw material.

In the 2008 crisis it lost a bit of its usefulness, for not only was there a economic crisis but there was also a known schedule vessel replacement cycle.   The bulk carriers have an expected lifespan of about 20 years, and the replacement cycle in 2008 coincided with the economic crisis -- making the index drop to an un precedent 666 level.  

While the US treasury has been tightening, for the first time in six years, the global trading economy has gone to the dogs.  Clearly there is now oversupply in the oil and gas sector, but that could be more a function if supply rather than demand.  What the BDI shows is that trade demands are at an all time low.  The BDI crashed to 400 over the last few days.  So the oil at $30/bbl is not only a function of a rise in supply, but also a function of a "fall" in demand.

BTW I've received a number of enquiries about a simple trade:  Buy 200,000 bbl of light sweet WTI oil today at $31.14/bbl and sell them forward with a delivery in two years --- the price is around $42/bbl.  Sounds like like an easy $10/bbl which would translate into a $2 million gross windfall.  Except for a few problems; credit, getting a vessel and keeping the oil in condition.  Oil left to its own device will naturally fractionates, so the vessel has to be able to "stire" the product.  Then there are the cost of storing... anyway, maybe a good trade but you need about $7 MM to make it work, for a gross revenues of $8.4 MM  which is a 9.4% IRR -- not bad, but is it worth that much trouble...


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