Baltic Dry Index

The Baltic Dry Index (BDI) measures the shipping costs for dry bulk goods and major raw materials including grain, iron ore, coal and other fossil fuels..  It is a number issued daily by the London-based Baltic Exchange, and has been in existence since 1744. Not restricted to Baltic Sea countries, the index takes in 23 shipping routes covering Handysize,Supramax, Panamax, and Capesize dry bulk carriers.1,3

Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved. The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and ships are too expensive to take out of circulation. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates...". 1

The index's movements are closely tracked as they reflect the demand for dry commodities from industries and consumers around the world. A higher demand for ships to transport dry cargo will obviously reflect in a strong index and vice versa. In 2009,when the Baltic slipped to record lows, western economies slipped into recession and growth slowed down in emerging countries like China and India.In Feb 2012, the BDI plunged to its lowest level. Thus the BDI is termed a leading economic indicator because it predicts future economic activity. 1,3

Another index, the HARPEX, focuses on containers freight. It provides an insight on the transport of a much wider base of commercial goods than commodities alone.1

Note: [Handysize, Supramax, Panamax, Capesize etc are naval architecture terms for size and design of bulk carriers that can pass through various canals and straits. eg: Panamax  and New Panamax are terms for the size limits for ships traveling through the Panama Canal.] 2

Sources:
1. http://en.wikipedia.org/wiki/Baltic_Dry_Index
2. http://en.wikipedia.org/wiki/Panamax
3. http://articles.economictimes.indiatimes.com/2012-02-06/news/31030685_1_baltic-dry-index-baltic-exchange-dry-bulk