Dry Bulk Sector : we are still out of the sector – watchlist only

Dry Bulk Shipping

The dry bulk shipping industry is affected by numerous factors—like world economies’ growth and commodity supply and demand. Considering the various world economies, China’s economic growth rate impacts dry bulk shipper’s movement. China is an important commodity market.

The sell-off

Since the beginning of September 2014, dry bulk shipping companies—like Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), Knightsbridge Shipping Ltd. (VLCCF), and Safe Bulkers Inc. (SB)—have all suffered great losses.

NM fell by 47%. DRYS fell by 42.9%. VLCCF fell by 41.8%. SB fell by 35.8%.

The Guggenheim Shipping ETF (SEA) tracks a variety of major shipping companies worldwide. It fell by 17.8%. It underperformed the S&P 500. The S&P 500 decreased by 4.8%.

Important indicators

Why have these dry bulk shipping companies fallen so much over the last few months? What do the industry fundamentals look like? We’ll use key indicators to help us answer these questions throughout this series.

The dry bulk shipping companies transport dry bulk—like iron ore, coal, and grain—around the world using vessels.

China is one of the largest commodity importers in the world. China’s manufacturing and real estate sector remains a key driver of dry bulk trade throughout the world.

At an industry level, iron ore exports out of Australia and Brazil are key data points to follow. Since coal is used to generate electricity, we’ll take a look at China’s recent thermal power output trends.

To gauge industry players’ sentiment and expectations of the industry outlook, we’ll look at newbuild and second-hand vessel prices. We’ll look at the Capesize and Panamax vessels in particular. We’ll also look at ship ordering activities.

We’ll provide the Baltic Dry Index’s fourth quarter outlook. We’ll also discuss analyst opinions on dry bulks—provided by RS Platou.

We’ll start by looking at the Baltic Dry Index. It’s an Index that reflects the overall rate of transporting dry bulks on water.

Why the Baltic Dry Index is decreasing

Baltic Dry Index

The Baltic Dry Index measures the cost of major raw materials. The raw materials are transported by sea in the global economy. It indicates a strict demand supply price situation. When the cost to move goods by ship is lower, there are less goods to ship.

The Baltic Exchange Dry Bulk Index is a combination of rates for different ship sizes. It factors in the average daily earnings of Capesize, Panamax, Supramax, and Handysize dry bulk transport vessels. Most of the vessel classes that make up the Index are at their lowest level for this time of year—since at least 2006. Capesize ships are an exception. They’re used to carry iron ore or coal cargoes of ~150,000 deadweight tonnage (or DWT).

September performance

The Baltic Dry Index recorded a decreased percentage in trading to 1,063 on September 30, 2014, from 1,151 at the beginning of the month. So far in October, the Index decreased more to 1,029 as of October 6, 2014. Capsizes pulled down the Index by the maximum rate. On a year-over-year (or YoY) basis, the Index recorded a decreased percentage from 2,115 on October 7, 2013. Since October 2, the iron ore ship charter cost—charter cost to ship iron ore—declined the most.

Impact on companies

How the Baltic Dry Tanker Index performs, especially its YoY growth, is one factor that has significant implications for dry bulk companies.

Historical trends suggest strong third and fourth quarters. Investors should watch the Index for any rate of increase.

As a result, the following dry bulk companies—like Star Bulk Carriers Corp. (SBLK), Safe Bulkers Inc. (SB) Baltic Trading Inc. (BALT), and Knightsbridge Tankers Ltd. (VLCCF), and the Guggenheim Shipping ETF (SEA)— could benefit in the short-term.

However, if the YoY changes remain in the negative, then the long-term outlook for these companies will remain in the negative
Company downgrades

Some of the largest names in the sector—including Capesize giant Knightsbridge Shipping Ltd (VLCCF) and Danish owner Norden—have also been downgraded in RS Platou’s recent quarterly report.

Knightsbridge is the largest Capsize owner listed in the U.S. It has been cut to sell from buy. Norden was downgraded to neutral.

Meanwhile, in the weaker dry cargo market, Platou also downgraded Diana Shipping (DSX) and Golden Ocean. It downgraded them from buy to neutral.

Platou analysts, Frode Morkedal and Herman Hildan, said that Knightsbridge is an attractive long-term investment vehicle. In the near term, weaker rates will bring a lower dividend.

Norden was downgraded to neutral. This was a result of the expected marginal rate improvement. It will pull its operating numbers back to black in 2015. However, the numbers won’t be at a level that justifies a higher stock price.

This could impact other companies in the industry like DryShips Inc. (DRYS), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA).

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