Risk: The inherent volatility of the dry bulk shipping industry
The dry bulk shipping industry is inherently volatile and cyclical, mainly due to the inelasticity of supply and demand’s contingency upon major commodities.
Shippers can’t change their supply immediately in response to changes in market demand, because it takes about two years to build a new ship. Besides, demand for commodities is uncertain, depending on the overall macroeconomic conditions in major countries as well as the development of world trade.
As a result, even minor changes in shipping demand could lead to substantial increases or decreases in average shipping rates. To monitor the latest movement in shipping rates on major routes, investors can refer to Baltic Dry Index, published daily by Baltic Exchange, which is the most accepted benchmark.
Plus, seasonal weakness also affects dry bulk shipping rates at certain times of the year.
After the surge in new orders for dry bulk carriers during 2007 and 2008, which resulted in depressing shipping rates, dry bulk shippers have become more cautious about macroeconomic activities worldwide, and they slowed their fleet expansion during 2012 and early 2013. Supply therefore tightened.
As a result, demand has exceeded supply in 2014 for the first time since the recession, as suggested by major shippers’ active fleet purchases. As the U.S. economy is recovering gradually, so is demand for dry bulk shipping. In 2014, projected increases in shipping rates resulting from tightened supply will benefit shippers and ease price competition in the dry bulk shipping industry.
Growing demand in China
China has always been one of the most important players in world trade, especially after the U.S. and EU’s financial crisis. On January 10, 2014, China’s Custom Administration declared that China had surpassed the U.S. as the world’s largest trading nation, since China’s annual trade in goods passed the $4 trillion mark for the first time. So, the demand for major commodities in China is crucial to the prosperity of the dry bulk shipping industry.
Even though China’s economic growth is estimated to slow down in 2014 because of the ongoing reform implemented by the new central government, trade will become more important to China’s economy.
The economic reform and relaxation of the “one-child” policy indicate ongoing urbanization and infrastructure construction along with more demand for major commodities, which domestic production can’t meet. Also, Chinese companies and consumers are more likely to purchase imported goods rather than domestic products that are more expensive and lower in quality.
© 2013 Market Realist, Inc.