In arguably the biggest changes to the Baltic Exchange since it came under new Singaporean ownership last year, the Baltic Dry Index is likely to be revamped. The proposed changes – which would see the handy component of the index disappear – have come in for criticism.
Analysts at Alphabulk in their latest weekly report outline the changes.
Today the BDI is calculated by a formula involving time charter rates for capes, panamaxes, supramaxes and handysizes, each getting a 25% weighting in the index.
The BDI has been running since 1985, and except for a couple of years at the start as a future on the BIFFEX, it has never traded with Alphabulk noting that freight traders prefer to trade time charter baskets for each segment rather than the BDI itself.
The Baltic Exchange has sent a note to its members in which it states:
“Following an analysis of trade flows and vessel utilisation, it is clear that the current composition of the BDI is not a true representation of the volumes of cargo being carried by each vessel sector. A recent study showed that deadweight utilisation between vessel types has the following approximate ratios: Cape 40% Panamax 25% Supramax 25% Handy 10%.
“When we look at the liquidity of the different sectors, the Handy sector is the least liquid. Accordingly we are recommending removing the contribution of the Handysize time charter average from the BDI and increasing the weightings of the Panamax and Supramax by 5%. The contributing timecharter averages to the BDI would therefore be: 40% Capesize, 30% Panamax and 30% Supramax.
“From our own analysis, based on the above weighting, the new BDI has an R2 correlation of 0.99 to the old BDI.”
Alphabulk questioned the decision to axe handysizes.
“[W]ill taking off a component of the index worth 10% of the cargoes carried by the dry bulk fleet make the new index more representative of the real market?,” the analysts mused, adding: “Further, will expanding a declining segment, the Panamax segment, from a real 19% in 2015 and 18% in 2016, to 30% in the proposed new calculation improve the accuracy of the BDI?”
Alphabulk also questioned whether the Baltic should continue to lump together baby capes, small capes, capesizes and VLOCs into one single capesize index.
Alphabulk suspects that the Baltic’s new owners, the Singapore Exchange, are looking to get some return on their investment by making the BDI more of a derivatives tool, something the analysts believe will not work well.
“Should the Baltic proceed with creating a derivative market based on the new BDI, they will ignore at their own peril the fact that there is no vibrant derivative market with only speculators: one of the ‘secrets’ for a healthy derivative market is a combination of speculators, natural buyers and natural sellers, the latter two requiring a very good correlation between the derivatives market and the physical market in which they operate,” Alphabulk concluded.
Commenting on the proposed BDI changes, Khalid Hashim, the veteran head of Thai dry bulk owner Precious Shipping, said the axing of handies from the index was “patently wrong”.
“The changes being proposed are not useful at all. To remove such a large segment of the market from the calculation of the BDI is patently wrong,” Hashim said, arguing the case for the exchange to relook at the market weightage of the current four sectors and to tweak them, not simply get rid of the handy component.
“What happens to fixtures that are linked to the Baltic Handysize Index (BHSI)?” Hashim mused. “What or how will they resolve the payments to be made in the future when there is no BHSI in existence? This is just one issue that will arise and which will cause a lot of grief,” he added.