But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Continued from Part 5
Supply and demand drives dry bulk shipping companies
Although an analysis of demand is necessary in order to project future dry bulk shipping rates, imports data aren’t widely available on a weekly basis. However, shipping rates, which reflect the difference in demand and supply, are collected on a daily basis at the London-based Baltic Exchange and published as the Baltic Dry Indexes (BDI). These indexes reflect the daily shipping rates to transport raw materials such as iron ore, coal, and grain across the ocean in the spot market. When demand outpaces supply growth, shipping rates tend to rise. But when an increase in supply doesn’t meet with demand, shipping rates fall. 1
Unchanged Baltic rates last week
From July 12 to 19, shipping rates for Supramax, Panamax, and Capesize vessels have remained mostly unchanged.
Aside from the lower capacity growth we saw in Part 5, shipping rates have risen lately mostly because of increased iron ore import to China, which makes up more than 20% of the world’s total dry bulk trade. A record-low inventory figure of ~57 million tons in March (a figure unseen for three years) and a fall of ~$40 per metric tonne (28%) since the government began tightening the property market in February are enticing traders to import more iron ore. Capesize vessels, which primarily haul major bulk materials such as iron ore and coal, have benefited most.
But inventory restocking, unless driven by solid demand growth, will only be a short-to-medium-term driver. This is because companies often restock inventories to take advantage of lower prices or to bring inventory levels to normal, which doesn’t take forever. This means that an increase in iron ore shipments due to inventory restocking activity will only result in demand growth that outpaces supply growth for a short period. However, a study did last week shows that inventory levels are near historic lows compared to crude steel production levels. Unless the prices of iron ore increase significantly, there’s still room for a continuation in iron ore imports growth.
If restocking activity ends and iron ore import growth stalls, shipping rates will fall again. If this does happen, Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Eagle Bulk Shipping Inc. (EGLE), Knightsbridge Tankers Ltd. (VLCCF), and Safe Bulkers Inc. (SB) will be negatively affected. Nonetheless, whether iron ore import growth will stall from here is open to debate, but some indicators in another series, Must-know: Commodity prices and dry bulk shipping stocks (Part 1: Inflation and steel), say that’s unlikely.
Learn more about the key performance indicators of the dry bulk shipping industry
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