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The Baltic Dry Index: A Solid Gauge of Global Economic Health
Tony Daltorio, Investment U Research
Funny how bulls and bears can look at exactly the same data, yet come to completely different opinions.
Take the Baltic Dry Index, which measures charter rates for ships carrying bulk commodities, for example.
Bulls use a high reading as proof that worldwide demand is picking up, whereas bears see it in a more pessimistic light. And with the index down nearly 50% from its June 3 high, bears claim it shows the fragility of demand in China, which drives much of the global demand for commodities.
But I believe the Baltic Dry Index is a key gauge of global economic activity. And it begs two questions. What is it doing and how can we make money from it?
The Baltic Dry Index & China’s Commodity Demand
The bulls and bears can say what they want to, but a closer examination of the Baltic Dry Index suggests that it isn’t nearly as simple as either group would like to believe.
You see, its recent fortunes stem from a complex mix of factors, including Chinese demand for two key commodities – iron ore and coal.
Imports of coking coal into China rose to 12.6 million tons during the first half of 2009 – up from 1.1 million tons in the same period last year. Meanwhile, thermal coal imports hit 24 million tons from January through June, versus imports of 4 million tons in the same period last year.
That’s quite a change. But not nearly as much as Chinese iron ore importers (a.k.a. steel mills).
According to Guy Campbell, Managing Director of the dry cargo division at Clarkson shipbrokers, China could very well import 550 million tons of iron ore this year – a significantly higher amount than last year’s 444 million tons.
And he has good reason to think so. During the second quarter, importers created massive congestion at Chinese ports and rates for the giant, iron ore-bearing vessels rocketed from $17,000 a day at the beginning of April to $93,197 by early June.
Of course, demand has slackened since, taking port congestion and vessel rates with it. And this is where it starts to get tricky…
The Ups and Downs of the Baltic Dry Index
The Baltic Dry Index has undergone repeated ups and downs this year, in large part because of the vacillation in rates to operate vessels.
Other smaller cargo ships, on the other hand, have enjoyed smoother sailing. If anything, as Campbell points out, they’ve been “fairly consistent” in 2009.
Most market participants expect the conditions in the dry bulk shipping market to persist for some time, with dry bulk ship owners earning only modest returns. Still, at least they’ll make a profit – and that’s worth noting in a market like this.
In addition, ship owners have a more positive attitude towards their particular sector of the industry, compared to many other shipping segments. And despite the volatile swings earlier this year, even owners of giant vehicles remain optimistic. With good reason, too, considering that daily rates of around $2,400 today are almost 10 times the rate from December 2008.
That means they can cover operating costs of $6,500 to $8,000 a day… for the time being at least.
Part of the summer’s spike in shipping rates resulted partly from the slower than expected delivery of new vessels, though with new deliveries expected early next year, the fleet size could increase as much as 15%.
If that happens, it could condemn the market to overcapacity for years to come, an obviously bearish outcome. If it doesn’t, the bulls win this round. Here’s what you can take away from this situation…
Ways to Profit From Dry Bulk Shipping
Compared to other major shipping markets such as oil tankers and container shipping – both of which face falling demand on top of an oversupply of ships – dry bulk shipping looks pretty decent.
Thanks largely to China, there is real year-on-year growth and many of the dry bulk shipping companies are making real money.
Investors looking to add some “bulk” to their portfolio have quite a number of dry bulk shipping companies to choose from. In addition, most of these stocks are still well off their 2008 highs – in some cases, down 80% or more – and could offer a great value play on a global economic rebound.
I’d recommend sticking with the largest dry bulk shipping companies…
- DryShips (NASDAQ: DRYS)
- Eagle Bulk Shipping (NASDAQ: EGLE)
- Genco Shipping (NYSE: GNK)
- Excel Maritime Carriers (NYSE: EXM)
If you have more confidence in the global recovery, take a look at the Claymore/Delta Global Shipping ETF (NYSE: SEA), which includes all type of shipping stocks in its portfolio.
Good investing,
Tony Daltorio
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One Response to “The Baltic Dry Index: A Solid Gauge of Global Economic Health”
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November 2nd, 2009 at 6:33 pm
considering that daily rates of around $2,400 today are almost 10 times the rate from December 2008.
That means they can cover operating costs of $6,500 to $8,000 a day… for the time being at least.
How does $2400/day cover $6500-8000/day???
I would be nice to read which of these shippers is getting the bulk of China”s importing.
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