Commodity products such as dry bulk shipping often go through cycles. These are characterized by periods of booms and busts. As it takes about a year or two from the time a vessel is placed to the delivery date, vessel capacity growth often lags demand growth. Given how uncertainly demand can move, it would be a miracle if ship buyers as a whole could correctly anticipate the number of ships required to haul growth in the dry bulk trade.
Because of these mismatches between vessel supply and demand growth, windows of opportunities develop. Subsequently, dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc (SB), as well as the Guggenheim Shipping ETF (SEA), are affected by these periods of ups and downs—especially if they’re largely exposed to the spot market.
Small and big cycles
Historically, rates have gone through small cycles of one to two years. This isn’t surprising, given the time it takes to construct dry bulk vessels. Outside of these short-term mismatches, the economic cycle also has a role to play. Cycle bottoms could last longer if the world economy faces extended periods of contraction or slow growth. On the other hand, we have booms that spike shipping rates for dry bulk shipping investors—like the 2000s, for example.
Given the weakness in coal imports and minor bulk imports, you might say the cycle has peaked earlier than usual. But this really depends on whether growth in minor bulks and coal can recover enough for us to see positive year-over-year growth in the Baltic Dry Index over the next four quarters or so. As China slows down, it’s unlikely that rates will revisit a cycle similar to the early 2000s—unless India cooperates. That may mean we won’t see the Baltic Dry Index average 2,000 or stay above that level for some time.