Must-know: Commodity prices and dry bulk shipping stocks (Part 4: Imports and shipping rates)

Baltic Shipping Index by Ship Class 2013-07-11Enlarge GraphContinued from Must-know: Commodity prices and dry bulk shipping stocks (Part 3: Imports and prices)

The economy, imports, and shipping rates

When economic recovery or expansion takes place, shipping rates tend to rise, as more commodities are imported. Higher profitability among steel manufacturers will also make iron ore purchasers more generous with higher shipping rates. When things are good, people tend to be more generous and willing to pay more. Investors may then ask, what happens to shipping rates when imports rise due to falling commodity prices driven by lower economic growth, as seen earlier in this series? Thankfully, we have a recent case that helps explain what could happen to shipping rates in the current environment.

Shipping rates can rise when commodity prices fall or flatten

Back in 2011, China’s economic activity began to slow as the government raised its interest rate up to ~6.5% and restricted lending because of high inflation. But falling commodity prices prompted traders to import more iron ore, which actually drove shipping rates for Capesize vessels (the largest class size of dry bulk vessels that primarily haul iron ore and coal) higher for a while until industrial output collapsed later. While lower economic activity would often pressure shipping rates as demand falls, steel manufacturers are less sensitive to shipping rates due to their record low rate, driven by industry overcapacity. So, based on this analysis, it’s possible for shipping rates to rise when commodity prices fall or flatten—as long as economic output and profitability continue to grow.

Learn more about commodity prices and dry bulk shipping

To learn more about commodity prices and their significance for dry bulk shipping stocks, continue to Must-know: Commodity prices and dry bulk shipping stocks (Part 5: Industrial output and outlook), which will follow later today.