Nail-Biting In Shipping

June 16, 2009

We look at the Baltic Dry shipping index as a canary in the coal mine of commodities, and they've been on a tear. What's not to love?
  • The BDI roller coaster
  • Chinese imports
  • Ship supply issues

 

Unlike, say, gold and oil, it's not often we get a detailed look at the prospects for shipping. When you talk shipping, specifically dry bulk shipping, you're talking about the supply and demand of ships as well as the commodities they carry, China, and finance - all interacting in often-unpredictable ways. Capital Link Shipping hosted a webinar on Friday to educate investors about the state of the shipping industry, and there were a few eye-openers.

Let's start with the Baltic Dry Index:

 

Baltic Dry Index 2009 to Present

 

Ride The BDI

Historically, since 1985 when the BDI was first published, the index averaged around the 2000 mark. But as Ted Petrone, president of Navios Corp. and Navios Maritime Holdings (NYSE: NM) pointed out during the conference, since China entered WTO in 2001, the BDI sat at around a 4000-point baseline for a few years.

Taken in that context, the early December2008 low of 663, as well as last June's high of over 9500 look like huge outliers. More recently, the index hit 4291 on June 3 and was at 3583 on Friday - pretty reasonable if you look at the long-term statistics - but given recent history, mainly December's low, the numbers have led to a lot of discussion. Not many indexes have risen 440% since Christmas.

Mr. Petrone explained the December low this way:

"This was not a supply/demand issue. It was really a credit issue that brought the BDI to that level. There were no letters-of-credit. In the fourth quarter the financial world was coming to an end, so we thought. Those sort of term letters-of-credit were not available. There were ships anchored all over the place. Those days are over - no one expects to see these levels again anytime soon."

In fact, credit - a key to operating a shipping company - is no longer a factor, according to Akis Tsirigakis, CEO of Star Bulk Carriers Corp:

"Credit has become available, in fact credit is not an issue anymore and is not affecting cargo volumes and freight rates anymore as it definitely did in November and December when the lack of it brought everything to a standstill."

And the recovery to current levels? "China, China, China," Mr. Petrone says, particularly Chinese iron demand.

Although China produces a lot of iron ore domestically, it's both lower quality and more expensive (roughly $85 to $90 a ton) than that which can be imported internationally - even including freight prices. With an estimated 72% of the $586 billion Chinese stimulus package going to construction, no wonder China gets the credit for pulling the shipping industry back from the brink. As long as international iron ore prices (Including the freight charge) remain lower than domestic, import demand, and therefore demand for ships, should do well.

 

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