Dry bulk investors' eyes and ears are on the Chinese government

Part 2
Dry bulk investors' eyes and ears are on the Chinese government (Part 2 of 8)

Investors in stocks like DRYS should follow the Baltic Dry Index

The Baltic Dry Index

Since falling from the beginning of the year, mainly due to seasonality, the BDI (Baltic Dry Index) has recently rebounded. The Baltic Dry Index is an indicator that reflects the general price of shipping dry bulks such as iron ore, grain, and coal across the ocean today in the spot market. In the spot market, ships are contracted out for one-time trips. On March 10, 2014, the Index climbed to a high of 1,580.

Baltic Dry IndexEnlarge Graph

Rising rates

The Baltic Exchange also has specific indicators tailored to different vessels. The index for Capesize vessels, the largest class of dry bulk vessel used to haul iron ore and coal, climbed to 3,045 on March 11, 2014. The index for Panamax vessels, primarily used for iron ore, coal, and grains, climbed to 1,104, and the Supramax vessel index climbed to 1,149. Year-over-year growth in the Baltic Dry Index also turned corners recently.

Forward freight agreements fall

As dry bulk shipping companies often track year-over-year changes in the BDI, dry bulk shippers should have benefited over the last few weeks. Despite these improvements, dry bulk shippers fell as rates in the FFA (forward freight agreement) market fell. Since FFA agreements are based on expectation of future rates and are largely traded by professionals in the dry bulk shipping industry, they are one of the most important indicators that reflect whether fundamentals are improving or deteriorating in the months ahead.

FFAEnlarge Graph

According to data from Freight Investor and Service, the average rate for Capesize agreements one calendar year ahead fell almost 11% from March 7, 2014, to March 11, 2014, after rising consistently over the past few weeks on optimistic outlook. The steep drop we’ve seen reflects a downward revision in dry bulk demand for the year ahead compared to what was previously estimated on concerns that trade growth may not be as strong as previously thought. Contracts for nearer-term periods fell by larger percentages over the past two weeks, suggesting possible weakness in the short term. Is this the beginning of a downtrend that will affect shippers like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM) as well as the Guggenheim Shipping ETF (SEA)?

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