Spot and time charter contracts
Dry bulk shippers, including those within the Guggenheim Shipping ETF (SEA), generally generate revenue via two contract types: spot (voyage) and time (period) charters. In the spot market, customers pay a one-time fee for shipping a specific amount of goods. In the charter market, customers borrow the ship for specific duration and the rate is quoted on a per-day basis. These are affected by the basic supply and demand of vessels.
The Baltic Dry Index is a common indicator that analysts, investors, and money managers follow to get a sense of where shipping rates are heading. Published by Baltic Exchange daily, the index tracks spot rates for key dry bulk shipping routes around the world, does its magic, and combines them all. Although the index tracks the spot market, spot markets and time charter rates tend to move closely with each other.
Look at the overall picture
While there are different fleet classes (as noted in the first article of this series), it’s important to know that they’re generally substitutable with each other. For example, if rates for Capesize vessels move too far away from rates for Panamax and Suezmax, customers would trade down to smaller vessels, pushing those rates higher. So the Baltic Dry Index is a good proxy for the overall industry’s fundamentals.
Look at each class
At times, however, it’s useful to dig into rates for a specific vessel class. This allows investors to understand the supply and demand balance for each vessel, and the source of dry bulk shipments. For example, Panamax and Supramax vessels had outperformed Capesize ships in early 2013, largely due to solid grain shipments from the Southern Hemisphere.
Volatility and seasonality
Investors should also note that shipping rates are volatile and seasonal, as vessel supply is quite fixed in the short term and trades are commonly disrupted by weather-related factors. But because this seasonal quality is well known, the market doesn’t always rise and fall based on shipping rates. What does affect share prices, though, is whether rates are driven by fundamental changes that will last. But there are multiple factors like valuations, technicalities, market sentiment, and macro factors that drive share prices too.
The next part of this series will address volatility in more detail, and why investing in dry bulk shippers isn’t for everyone.