The Baltic Dry Index has been getting a lot of attention on CNBC lately. For those who don’t know, The Baltic Dry Index (BDI) is the spot (or daily) rates shipping companies charge to ship dry stuff such as coal or grains. CNBC seems to be driving fear into investors with the thesis that the drop in shipping rates is due to less shipments being made, which is an indicator of a worldwide slowdown. Sure, that certainly is possible, but before you run for the hills just on this piece of data, take a look at the BDI over the past several years:
BCI (Cape Index), BPI (Panamax Index), BSI (Supramax Index). Chart from Dryships.com
Notice, with the exception of 2007, rates are usually in a downtrend from January until July. From July through November, there’s usually a pretty strong rise in rates. In ‘04 and ‘05, rates returned to or fell below where the started the July-November run. As far as I’m concerned right now, we are just returning to the industry norm. In ‘04 and ‘05 we didn’t have China growing at gangbuster speeds like it did in ‘06 and ‘07. Still, China is hammering out a 11% GDP growth, which is fine and probably more sustainable and stable for the world. This might continue to put a higher floor beneath the BDI as more percentage of the world’s commodities continue to flow into China.
Nearly an identical image to the BDI’s dropoff since January, investing in one of 2007’s hottest momentum drybulk shipping names probably destroyed a lot of people’s portfolio’s already if they didn’t take profits or got to the party late. Dryships (DRYS), who uses the spot rates instead of longer term contracts, moves most in tandum with the BDI. Dryships has fallen from above $130 at its high and now resting around $50. Still, people who bought DRYS this time last year are still up nearly 300%. These shippers may have a ways more to fall till the usual July lows. Also at that time, we should have a better idea how deep of a recession we’re in, and whether that will put a cap on shipping rates and thus these shippers’ stock price.
If the world economy rebounds going into the summer, you might be able to play the July through November rally one last time, but at the moment I wouldn’t recommend it. Currently we have a shortage of ships, which added to the spike in rates in 2007, but come 2009 and beyond, new ships being built now will be in service. So, you might get the July-November 2008 rally wind at your back, but with traders constantly looking several months out, the new ships in 2009 would likely cap much momentum in these names. China may have to go back to growing at warp speeds to make these drybulk shippers fly to the upside like in 2007.
Crazy action out there still. Be careful.
