The Baltic Dry Index (BDI) is one of the metrics investors use as a leading indicator for global economic and trade outlook. A rising BDI is generally a positive for the dry bulk shipping industry’s performance. A falling BDI is usually negative for dry bulk shipping rental margins.
After the BDI failed to break and sustain above 1,100 on November 28th, 2012, the index has started to roll over. The BDI reflects the price of moving major dry raw materials such as grains, coals and iron ores across the ocean. It is a key indicator that is primarily influenced by the dry bulk shipping industry’s supply and demand, updated every business day by ship brokers through the Baltic Exchange. As it takes at least two years to build a ship, lending to an inelastic supply, a marginal increase or decrease in demand can lead to a substantial change in the index.
While the index has risen more than 50% from mid-September due mostly to encouraging developments out of China, shipping remains pressured from excess supply and new ships that are expected to enter the industry in the medium term. As supply growth is expected to continue to outpace demand growth, the price of shipping dry bulk raw materials will remain capped. More likely than not, the BDI will continue to fluctuate below 1,100 and the probability of further decline in the index is high.
A lower index will be negative for dry bulk shipping companies’ revenues, earnings, and stock prices. These companies include Dryships (DRYS), Excel Maritime (EXM), Eagle Bulk Shipping (EGLE) and Diana Shipping, Inc. (DSX). The Guggenheim Shipping ETF (SEA), which also invests in high-dividend paying shipping companies, will also be negatively affected.
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