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Supply and demand balance drives dry bulk shipping companies
The dry bulk shipping industry’s service is commoditized. So supply and demand balance is one of the most important drivers for dry bulk companies’ top- and bottom-line performances. One metric available to investors is the Baltic Dry Index (BDI), which reflects the daily shipping rates to transport raw materials such as iron ore, coal, and grain across oceans in the spot market.1 When demand growth outpaces supply growth, shipping rates rise, supporting companies’ revenues, earnings, and profits.
Baltic rates peaking off?
On July 5, the Baltic Supramax, Panamax, and Capesize indexes fell overall compared to the prior week, which might be the start of lower rates to come over the next few weeks or months.
To see why these falls could foreshadow lower rates, it’s important to see what has happened. Shipping rates—Capesize in particular2—have been on a run over the past few weeks due to China’s iron ore restocking activity, which makes up more than 20% of the world’s total dry bulk trade. Chinese mills have begun restocking, as inventory fell to ~67 million tons in March, a figure unseen for three years, and prices for imported iron ore have fallen by ~$40 per metric tonne (28%) since the government acted to cool down the property market in February earlier this year. This has supported shipping companies such as Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Eagle Bulk Shipping Inc. (EGLE), Knightsbridge Tankers Ltd. (VLCCF), and Safe Bulkers Inc. (SB).
Inventory restocking: short-term driver
But inventory restocking, unless driven by solid demand growth, will only be a short-term driver—not a long-term demand driver. This is because companies often restock inventories to take advantage of lower prices or to bring inventory levels back to normal (which doesn’t take long). 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. Once iron ore import rises to a new level, and if capacity growth remains elevated, 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) may be negatively affected.
To find out whether capacity growth will remain elevated over the next few months, see Capacity growth falls to 3.5-year low, why dry bulk shipping recovery continues.
© 2013 Market Realist, Inc.