The Baltic Dry Index is a measure of the cost associated with shipping of goods such as raw materials, grains and other commodities.
Since prices for shipping coal, rice, wheat and other commodities are seen as a proxy for the strength of world trade and global economy, a falling Baltic Dry Index suggest that ship owners are cutting prices in the face of falling demand.
The BDI has basically gone from the 3000 mark in beginning of 2010 to 1120 in May 2012. That is a decrease of over 60% in slightly more than 2 years!
If the global economy is not heading for a recession, then why is global shipping slowing down so dramatically? Since the Baltic Dry Index provides a glimpse of global trade of major raw materials and involves the assessment of shipping rates worldwide, it adjusts before the overall economic picture changes. Consequently, many economists believe that measure of global shipping activity such as the Baltic Dry Index is a reliable economic indicator.
The Baltic Dry needs however to be handled with a degree of caution, but it does provide information about trade flows that is both timely and unaffected by speculation.
It is not exclusively an index for the demand side of the equation. It also captures the supply side of the shipping industry which has been impacted in the last few years by oversupply.
To sum up, if rates go up it can come from either a supply shortage or a steady commodities demand, explaining the volatility surrounding the index. In a situation where ship owners match demand, which over the long run they will, then rates will normalize and be reflected in their costs and profit margins.
Anyway, it is an index worth keeping an eye on.