The Baltic Dry Index (BDI) has lost an amazing 90% of its value since the beginning of the year, and is 93% off the highs of May and June.

As we explained in The Baltic Bet, shipping rates are tracked primarily by the Baltic Dry Index, a blending of the rates to ship bulk dry goods (largely ores and grain) on three different-sized boats on the four main shipping routes. The BDI gives you a good idea of what the spot price is for hiring a ship, and as such, serves as an indicator for supply and demand. The current low level of the index (and this, the spot price) tells you that demand for dry bulk vessels is unbelievably low. This means that somewhere there are lots of enormous ships lying around in ports. Either because there are literally no charters to be had, or more often, the day rate simply isn't high enough to even offset a voyage's expenses, much less turn a profit.

All the things that make a boat go cost money - crew salaries, provisions, lubrication costs - and no company wants to pay for a pleasure cruise when the vessel should be making money. It's worth pointing out that the pressures involved here aren't always easy to tease out from the shipping companies themselves. Eighty percent of the global dry bulk fleet is privately held, and according to Forbes, anecdotal rumors are supporting the idea that many of these private vessels are anchored, rather than operating at low spot rates.

It would stand to reason that shipping companies would be in dire straits with the BDI so low, and at first glance, the company/BDI tie looks dramatically connected.

OK, clear as mud. Normally I wouldn't comment on (or even post) an anti-Tufte mass of indecipherable lines like the one above, but it does illustrate one thing - while the companies trend up and down together, they live in an implied trading range where there's plenty of money to be made.

Making Money

Let's tease out a few companies.

Shipping companies charter their vessels out a few different ways - spot charters, time charters and "bareboat" charters. In both spot and time charters, the boat's owners are usually responsible for operating expenses such as crew costs, provisions, lubricating oil, insurance, maintenance, dry-docking and repairs. The difference is that in a spot charter, the owners are also responsible for any voyage expenses such as port fees and fuel costs, because a spot charter is generally limited to a specific voyage or delivery - take my wheat to China, stat! In a time charter, the boat owner doesn't care about the intended use. The person chartering the ship handles voyage expenses, because the contract is for a specified time period, which can be years in length. It's kind of like the difference between taking a cab downtown and renting your limo for the prom.

By contrast, a bareboat contract is like leasing a car. The charterer is responsible for all voyage expenses, on top of maintenance and other operational costs.

A company can have its boats out in any combination of these ways, depending on its corporate strategy. Historically, companies that are more exposed to the spot market can see their revenue fluctuate wildly. Many companies prefer to lock their fleet into time contracts and a more stable revenue stream, but contracts can be defaulted on, so there are no guarantees.

Because of the variation in mix of charter types each company can have, the industry has devised a way of comparing apples to apples. The time charter equivalent (TCE) is the average daily revenue performance of a vessel on a per-voyage basis. Companies divide operating revenues (minus voyage expenses and commissions) by operating days for a specific time period. This little miracle number allows you to look across companies and compare company performance despite changes in charter mix.

The other handy number the companies report is fleet utilization, a measure of how well a company is using its fleet.