How does the Baltic Dry Index differ from Libor?

Yesterday Investment Europe explained how the Baltic Exchange calculates the Baltic Dry index, a cost benchmark for transporting dry bulk cargo such as coal and iron ore. Today, Bill Lines from the Baltic Exchange explains how the method of producing the maritime index differs from the production of the recently highlighted Libor benchmark.

In the wake of the scandal over the alleged fixing of Libor rates by banks, the European Commission announced this September that it is taking an in-depth look at the production of indices in use across the financial and commodity markets.

The Commission, which drafts laws for the European Union’s 27 member states, has issued a questionnaire looking at all aspects of the production of indices including the calculation processes and the purpose and use of benchmarks.

(The historical paths of the various indices themselves are shown in charts, copyright to Baltic Exchange Information Services, at the end of this story.)

The Baltic Exchange has been providing the bulk shipping markets with a trusted set of benchmark indices based on independent shipbroker assessments since 1985, but there are countless indices used in almost every type of market imaginable.

From macro-economic indicators produced by public bodies covering consumer prices to commodity indices produced by news agencies which use the underlying prices of traded products, indices come in all sorts of shapes and sizes.

Bulk freight rates for seaborne trade are a particularly niche “commodity” to assess, given the specialist knowledge required to assess the variations in vessel types, speed and consumption, ports and numerous other factors.

The index model used by the Baltic Exchange is one which was established in 1985 with the launch of the Baltic Freight Index and used to settle trades on the world’s first freight futures exchange, BIFFEX.



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