Baltic Freight Indices

The Baltic Exchange in London is an exchange where contracts on shipping costs are traded. The exchange provides daily freight market prices and maritime shipping cost indices that are used to settle freight futures. The exchange used to operate on a trading floor, but now all transactions take place over the phone.

The exchange was founded in the mid-18th century. Like several other London exchanges, it started out as a coffee shop. The name first appeared as the Virginia and Baltick Coffee House in 1744.

The Baltic exchange publishes three major indices daily:

The Baltic dry index represents estimates of the cost for chartering a ship to carry bulk commodities, such as iron ore, coal, grains, steel, cement, etc. The index is expressed in terms of dollars per day per metric ton of freight. Every working day, a panel of international shipbrokers submit their estimates of rates for 23 representative shipping routes covering the index’s four sub-indices and these are weighted together to create the overall index. It is published at 1300 London time.

The dry index’s four sub-indices refer to various routes and the size of ships: Panamax for those ships that can fit through the Panama canal, Capesize for those that are too big for the Suez canal and have to go around the Cape of Good Hope, and Supramax and Handysize for smaller bulk carriers with a capacity of less than 60,000 dead weight tones.

Importance of the index

The Baltic dry index measures the supply/demand balance for shipping. The supply of ships is relatively inelastic in the short term – it takes two years to build a ship, while once it’s built, the fixed costs of owning it are so high that ship owners would often rather run them at a loss than take them out of service. Therefore, the short-term movement of the index is a good indicator of the global demand for the commodities shipped aboard dry bulk carriers, such as iron ore, coal, and grains. Since these goods are generally raw material inputs that are used in making other goods, the index is also considered to be a leading index of future economic growth.

One key point to note is that there is no speculative content to the index. People who charter ships have goods to move. Also, the index is not subject to revision and it is available every day.

The fact that the dry index, which began in Jan. 1985, was at a record low in early 2016 is worrisome. It inevitably reflects a slowdown in demand for commodities as China tries to rebalance its economy away from investment and more towards domestic consumption. In addition, it also reflects overbuilding of ships in response to the increased investment by China.

 

Tanker indices

The dirty tanker index refers to tankers carrying crude oil, while the clean tanker index refers to ships carrying refined products.

The Baltic dirty tanker index is comprised of 12 major tanker routes. It is expressed in Worldscale* rates. The clean tanker index is made up of six major routes and is also quoted in Worldscale rates.

Unlike the dry index, the interpretation of the tanker indices is a bit harder, because tanker rates do not always reflect the supply and demand for oil in the way one might think. Normally, when demand for oil is high, there would be a lot of demand for tankers to move the oil and the price of chartering a tanker would go up. However, when the price of oil is low, some oil companies or speculators charter tankers to use as floating storage tanks, and that can cause the price of chartering a tanker to go up even as the price of oil falls.

*Worldscale is a unified system of establishing payment of freight rates for oil tankers. It combines the distance between two ports and the cost per metric ton for carrying the shipment into one number. Contracts for individual ships are then expressed as a percentage of this Worldscale rate.

 

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