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Shipping stocks soar on higher rates

Shipping rates affect revenue

Shipping rates, the price of using ships, is a key driver of revenue for dry bulk shipping companies that haul key raw materials, such as iron ore, coal and grain, across the ocean. When shipping rates rise, it’s often because of tighter supply, and this is often seen as a positive sign for shipping companies. On the other hand, when shipping rates fall, fundamentals and share prices will often follow. One set of indicators that investors can follow is the Baltic Exchange’s Baltic Shipping Indexes. Movements in these indexes track the overall prices of shipping goods in the spot market (where customers pay a price to ship a certain amount of goods for one trip).

Baltic Shipping Index by Ship Class 2013-08-15Enlarge Graph

Capesize rates breaks out of a short-term downtrend

The baltic indexes are collected everyday by the exchange, headquartered in London. On August 14th, there was a spike in capesize indexes –– the largest class of ship that primarily hauls large bulk materials, such as iron ore and coal. While the index for supramax and panamax vessels stood relatively flat, the capesize index rose 9.5% from 1846 to 2021. The move, which broke out of a short-term downtrend, had caught many traders’ attention. That has led traders to bid up shares of dry bulk shipping stocks, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF) and Eagle Bulk Shipping Inc. (EGLE).

Ongoing turnaround expected

Capesize rates were relatively weak at the beginning of the year due to lower exports of iron ore out of Brazil. They have also been falling over the past few years because of new deliveries that had outpaced global demand. But many experts and managers have become more optimistic with the future prospects of the dry bulk shipping, as supply is expected to start tightening. Fewer new ship deliveries, low profitability and higher iron ore imports are expected to drive rates higher. If rates can rise higher from here towards the end of the year, then shares of dry bulk shipping companies will too. The tightening of spreads between the different forward contracts points to the likelihood of higher rates: continue to forward contracts.

For more indicators that reflect the shipping industry’s fundamentals, visit our Marine Shipping page. These indicators are great for understanding what drives dry bulk shipping companies.