What’s on the Horizon for the Dry Bulk Shipping Industry?
Current dry bulk shipping industry
In 2015 to date, the Guggenheim Shipping ETF (SEA), an index weighted with dry bulk shipping companies, has dropped 5.8%, and the Baltic Dry Index, or BDI, has declined 23.3%.
What is dry bulk shipping?
Dry bulk shipping refers to the transportation of homogenous bulk cargoes by bulk vessels on an irregular scheduled line. The industry is affected by numerous factors such as the growth of world economies (VXUS) and commodity supply and demand. Note that investors can gain exposure to commodities through the SPDR S&P Metals and Mining ETF (XME).
The dry bulk market is likely to be driven by the low cost of commodities across the board, which should lead to more trade among countries. In a recent report by Hellenic Shipping News, market research firm Allied Shipbroking is cited as noting, “with commodity prices still under pressure, and possibly slipping further as the US dollar gains ground, there could be room for extra demand to surface down the line.”
The research firm is also cited as saying that Chinese imports of iron ore have been on the rise since late February 2015. So, this is another factor favoring industry growth. What’s more, with the sliding value of the Brazilian real, Brazilian iron ore could gain the competitive edge. And, this could lead to a sharp increase in demand for longer haul routes.
This would likely force out some of the locally sourced supply in China, rather than affect the Australian-sourced supplies. The result would be positive for the dry bulk shipping industry.
In this series, we’ll look at some of the important metrics that drive the dry bulk shipping industry. For example, China’s PMI (or purchasing manager’s index) is one of the major yardsticks applied to ascertain the economy’s manufacturing growth and related demand for commodities. We’ll also look at vessel values by assessing vessel prices for newbuilds, secondhand vessels, and the orderbook for dry bulk ships.
The Baltic Dry Index Slumps to 30-Year Low in February
Baltic Dry Index
The Baltic Dry Index, or BDI, tracks a number of shipping routes and the prices paid for transporting major bulk commodities such as coal, iron, steel, and copper across the seas. It factors in the average daily earnings of dry bulk transport vessels such as Capesize, Panamax, Supramax, and Handysize. The index measures the demand for moving these raw materials against the supply of ships that can carry them.
Current index performance
Between January 2015 and March 20, 2015, the Baltic Dry Index recorded a significant trading decrease of 23.3%, down to 591. On a year-over-year basis, the index has declined by 63.5%.
In the month of February, the Baltic Dry Index slumped to its lowest point in 30 years, dragged down by China’s economic slowdown.
Factors affecting the slide
The slowdown is reflected in international trade figures as well. Exports in January dipped by ~3%, and imports slumped by 20%. It’s the fall in imports that’s putting pressure on freight rates across the world and contributing to the decline in the BDI.
The dip in the BDI is also due to excess shipping capacity. Shipping companies around the world went on a buying spree when the Chinese thirst for raw materials to fuel its economy seemed to be unquenchable.
Industry analysts expect the Baltic Dry Index to remain depressed for the next two to three years. With the index retreating, companies like DryShips (DRYS), Diana Shipping (DSX), Navios Maritime Partners (NMM), Navios Maritime Holdings (NM), and Safe Bulkers (SB) are likely to be affected. So is the SPDR S&P Metals and Mining ETF (XME), which invests in industries such as steel, coal and consumable fuels, gold, precious metals and minerals, aluminum, and diversified metals and mining.