Rental rates for dry bulk shipping continue to fall

Baltic Dry IndexEnlarge GraphJust like Wall Street traders often say price action is a key forward indicator to monitor, the Baltic Dry Index is an important leading indicator for the bulk shipping industry. Prices for shipping rentals in the industry are referred to as day rates. A day rate is the price of a service rendered over one day. The bulk shipping industry transports key raw materials such as iron ore, coal, and grain across ocean. One of the leading destinations for these commodities is China. When prices for transporting bulk materials fall, it is generally a negative for shipping companies, since their margins are highly correlated to day rates. Day rates across the dry bulk shipping industry are represented by the Baltic Dry Index graph below:

Baltic Dry Index Continues to Lag 

On February 1st of 2013, the Baltic Exchange provided us with data that the Baltic Dry Index (BDI) fell to 750. The index reflects the price of shipping dry bulk materials across ocean using data provided by shipping companies. Since rising to a recent high of ~1,100 three months ago, the index has generally trended lower. This is interesting to see, given that several industries, along with equity markets as a whole have risen from their September 2012 lows. Broad markets have been continuing to grind higher due to announcements of economic stimulus from countries like China, Japan, South Korea, Brazil, and the United States.

Excess Capacity Continues to Pressure BDI

The Baltic Dry Index has not followed other key related industries higher primarily because of excess capacity that continues to plague the entire industry (see “Dry bulk capacity marches north in January 2013“). When there is an increase in supply of ships, and demand lags, companies need to lower their rental rates to attract additional customers. This is negative for companies such as Dry Ships, Inc. (DRYS), Diana Shipping, Inc. (DSX), and Eagle Bulk Shipping (EGLE). The Guggenheim Shipping ETF (SEA), an ETF that performs similar to the Dow Jones Shipping Index and includes dry bulk shipping companies, will also be unfavorably affected.