BDI & DSK: Shipping Chaos

February 19, 2009

The Baltic Dry is supposed to be a real measure of shipping values, but the recent insanity shows it's a flawed indicator.
  • The life-threatening drop
  • The 200% pop
  • Diana Shipping's strong earnings

 

A quick recap: The Baltic Dry Index (BDI) is a weighted composite index of the daily rate to ship dry goods (largely ores) on three different sizes of ships on four main shipping routes. The index provides an idea of what the spot price is for hiring a ship, and by extension is an indicator of shipping supply and demand. A high index level means the cost of hiring a boat is high (and shipping companies are making money - sometimes a lot of money). A low index level means that demand for ships is low and thus so are the costs of renting one.

Needless to say, the BDI is pretty interesting to those in the shipping industry - but it has a wider following than that, and last week, the news was full of headlines touting the Baltic Dry Index's pop of 15% in one day, and a run of 17 consecutive positive days, racking up a gain of over 199% in a fortnight's trading. The reason given for the steady uphill climb was ironclad: Increased shipments of iron ore led to increased demand for ships - and fewer ships available for hire.

 

 

(More Baltic Dry Index charts available here.)

Shipping stocks were quick to respond to the pop, with share prices rising with the, pardon the pun, tide. The chart below shows two bulk shippers - Diana Shipping (DSX) and DryShips (DRYS) in relation to the BDI.

 

 

Both companies' stocks popped on the BDI news, even though, as I discussed in Digging Into Shipping, they have different exposures to the spot rate market - Diana Shipping's fleet being completely under time charter and DryShips having more exposure to moves in the spot market, with less of its fleet committed to time charters.

The BDI's upward streak was broken last Thursday as demand from China's steelmakers for iron ore and coal weakened again.

Good News?

Yes, the BDI has roughly tripled since bottoming out in December (rising from a value of 663 on December 5 to 1,895 on February 17) - but in the grand scheme of things, it was just a tiny blip on the radar.

 

Does it signal a recovery in the shipping industry and a recovery in the global commodity market? Most investors would like to believe that it does, but it is too soon to be sure. And, as with many indices, we may not know until we look back - it's always easier to call the bottom after the fact.

At its peak last year, the BDI reached a high of 11,793, and shipping rates for cape size were in the neighborhood of $230,000 per day (put in perspective, shipping analysts estimate the actual operating costs of a cape-size ship at around $6,500). As of Tuesday, the BDI stood at 1,895 and shipping rates for cape size vessels were $31,370. The year prior (2/17/08) the rate was $120,607. At the bottom of the trough, December 2, 2008, rates were $2,316 per day. The water cooler joke was that we were going to rent one and build a skateboard park in it.

Analysts have touted the BDI as the index to watch if you are interested in the global commodity market - the idea being nobody hires ships unless they have stuff to transport. And the logic sure held true as the commodity markets tanked this past summer and fall. As demand for commodities fell, so did the BDI because no one was buying or shipping much of anything - be it iron ore or grains. This is why all eyes are looking at dry bulk shipping at this time and the BDI's large jump last week garnered headlines across the world. (Commodity Shipping Index Advances the Most Since at Least 1985, Dry Bulk Shipping on the Rise)

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