Continued from Part 1
Supply and demand balance drives dry bulk shipping companies
The dry bulk shipping industry’s service is commoditized. So supply and demand balance is one of the most important drivers for dry bulk companies’ top- and bottom-line performances. One metric available to investors is the Baltic Dry Index (BDI), which reflects the daily shipping rates to transport raw materials such as iron ore, coal, and grain across oceans in the spot market. 1 When demand growth outpaces supply growth, shipping rates rise, supporting companies’ revenues, earnings, and profits.
Baltic rates peaking off?
On July 12, the Baltic Supramax, Panamax, and Capesize indexes rose overall compared to last week.
- Supramax: 924 to 897
- Panamax: 1,008 to 1,097
- Capesize: 1,929 to 2,058
Shipping rates have risen lately because of increased iron ore import to China, which makes up more than 20% of the world’s total dry bulk trade. A record-low inventory figure of ~57 million tons in March (a figure unseen for three years) and a fall of ~$40 per metric tonne (28%) since the government began tightening the property market in February are alluring traders to import more iron ore. Capesize vessels, which primarily haul major bulk materials such as iron ore and coal, have benefited most.
Inventory restocking: short-term driver
But inventory restocking, unless driven by solid demand growth, will only be a short-term driver—not a long-term demand driver. This is because companies often restock inventories to take advantage of lower prices or to bring inventory levels back to normal (which doesn’t take long). This means that an increase in iron ore shipments due to inventory restocking activity will only result in demand growth that outpaces supply growth for a short period.
Once iron ore import growth stalls, and if capacity growth remains elevated, shipping rates will fall again. If this does happen, Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Eagle Bulk Shipping Inc. (EGLE), Knightsbridge Tankers Ltd. (VLCCF), and Safe Bulkers Inc. (SB) may be negatively affected. Whether this is just an inventory restocking activity or whether this is backed by solid demand from steel manufacturers (a major consumer of iron ore and coal) is open to debate. Some indicators in another series, Must-know: Commodity prices and dry bulk shipping stocks (Part 1: Inflation and steel), point to the second explanation.
Learn more about the seven key shipping indicators
Continue back to Part 1 to see the list of other key shipping indicators.
- The two main revenue generation models in the shipping industry are Spot (Voyage) and Time (Period) Charters. “Spot charters” refer to the one-time price of shipping a specific amount of raw material, while “time charters” reflect the price of borrowing a ship’s service for a specific period. “Time Charter Equivalent” (TCE), which converts spot charters (specified in $ per ton) to time charter rates ($ per day), is often used to compare companies in different markets. The two often mirror each other over the medium and long terms. ↩
More From Market Realist
- Diana Shipping: the most undervalued dry bulk shipping company
- Shipping recovery continues with additional purchases, long-term opportunity
- Dry bulk shipping rates rise due to restocking, but likely downside looming