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Monday, January 24, 2011

The Baltic Dry Index – A Pure Global Supply v. Demand Barometer? - Part 3 | STRATEGIC BUSINESS AND MARKET TRENDS

RD Watkins
Strategic Business and Market Trends with RD Watkins

In our previous installments of this series, we explained what the Baltic Dry Index is, what materials it pertains to and how margin / pricing pressures and underlying commodity cost could be implicitly forecast using its data. Now we progress into evaluating competitors and the weaknesses of the index.

Capital Deployment Commitments and General Business Confidence

The BDI is also an indirect indication that capital is being committed to raw materials needed for end state conversion to consumables. A rise in the BDI is indicative of more shipping going on across the globe. Because the supply of ships is relatively inelastic, any increase or decrease in demand makes itself known quite quickly in the movement of the index. Any business that has a global footprint may use the BDI as a general indicator of business uptick and down ticks.

Some would argue that the recent drop in the BDI can be accounted for by the number and volume of underutilized dry cargo ships and assume they represent an oversupply, a buffer if you will, in this supply demand equation. If that is so, it should be able to be verified via reports on growth and shrinkage of the industry slack. Also, take into account that the initial drop in early 2009 triggered a large number of decommissions of capacity and tear down for scrap in shipyards. That trend is now in reverse in that there are reports that there are 200+ ships near to completion and ready to be put into service. Being that it takes years to plan and build these ships, this element of the equation is relatively inelastic and readily researched.

Decoupling the US Dollar Value within the BDI and Global Commerce
Comparison of BDI peak vs. today normalized to the price of gold rather than the USD as the numerator. Due largely to money supply efforts by the US Federal Reserve labeled Quantitative Easing, removal of the changing value of the USD as a distortion to this indicator is necessary. Lets use gold that has intrinsic value across the globe.

Based on the above, the BDI indicates a shrinkage of demand to the just a tick over 8% of what it was on May 20, 2008. The real question is how can this be used as a baseline going forward. An astute investor can use a similar calculation to determine that the real value of the Dow is not as it seems due, again, to the inflationary value of the USD upon which all stocks on that exchange predicate there reported values. We live in a global economy and using a benchmark that eliminates distortions of fiat currencies, intense media forces, gyrations and manipulation is critical to an entrepreneur making start-up or ongoing strategy plans into the future.

Although the BDI is not a "pure" indicator of global supply and demand relating to the pertinent products, it can be used as a trend assessment data point in a strategist toolbox. Look at your industry, determine if you have touch-points to the materials that correlate to the BDI and compare its historical charts with the charts of your businesses waxing and waning. See if you can use it as an adjunct in your strategy toolbox...
  • In Part 1 we presented the Baltic Dry Index; what it is and how it tracks the beginning of the supply chain.

  • In Part 2 we presented how the BDI indicates trends in global margin pressures and commodity demand.
RD Watkins brings value and builds productive and collaborative relationships by "Applying Common Sense Project Management Principles in a Virtual World". He fills the role of Senior Project Manager, is a PMI certified PMP® (Project Management Professional) and holds CompTIA IT Project+™ credentials. You can connect with RD to discuss his capabilities in cost effectively managing and enhancing productive consensus on your virtual projects through his profile at or contact him via email at

For more information, please visit RD's TNNWC Bio.

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