U.S. Markets close in 4 hrs 20 mins

Dry bulk shipping weekly analysis (Part 8: Shipping rates)

Xun Yao Chen, Industrials Analyst

Continued from Part 7

Supply and demand drives dry bulk shipping companies

Unlike imports data that aren’t widely available on a weekly basis, shipping rates (which reflect the difference in supply and demand), are collected on a daily basis at the London-based Baltic Exchange and published as the Baltic Dry Indexes (BDI). These indexes reflect the daily shipping rates to transport key dry bulk raw materials in the spot market. When demand outpaces supply growth, shipping rates tend to rise. But when an increase in supply doesn’t meet with demand, shipping rates fall. 1

(Read more: Dry bulk capacity growth slows further, encouraging sign for later half of 2013)

Lower rates in an uptrend 

Last week, the Baltic Dry Index fell from 1,065 on August 2 to 1,001 on August 9, dragged down by declines in Capesize and Panamax vessels. Excess supply growth in Panamax vessels continues to put downward pressure on rates. But current levels still stand higher than what they were for the most part of 2013. Shipping rates in the spot market have risen lately due to the lower capacity growth we saw in Part 4, the higher oil prices that shipping companies are passing on to customers, and increased iron ore trade from Australia (see Part 6) and Brazil.

Higher imports have been driven by continuous growth in China’s steel output, a record-low inventory figure of ~57 million tons in March (a number unseen for three years), and a decline of ~$40 per metric tonne (28%) since the government began tightening the property market in February that has made imported iron ore more attractive. Capesize vessels, which primarily haul major bulk materials such as iron ore and coal, have benefited most.

(Read more: Supramax price rises first time since mid 2010, signs of shipping recovery)

Future development

But as imported iron ore prices have risen to a recent high of $135.5 per metric tonne, the likelihood of lower iron ore imports has or will negatively impact rates in the near term. Nonetheless, investors expect iron ore prices to remain low as Australia and Brazil boost capacity, as we discussed in Part 6, by the end of this year, which would be positive for dry bulk shippers. Low inventories and continuous steel production China—despite what markets have feared—should help absorb the increase in supply. Plus, as U.S. rain improves prospects for a record corn output this year, analysts expect grain shipments to grow by 8% annually, likely to support Panamax rates.

(Read more: Why the Baltic Dry Index has decoupled from the Chinese market)

Shipping rates outlook

If the capacity trend we’ve seen in Part 4 continues to show improvements, we’ll likely end up seeing higher shipping rates in the second half of 2013 compared to the first half—a positive for companies such as Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), DryShips Inc. (DRYS), Knightsbridge Tankers Ltd. (VLCCF), and Safe Bulkers Inc. (SB).

Learn more about the key performance indicators of the dry bulk shipping industry

Continue to Part 9: Forward contracts, or go back to Part 1 to see the list of indicators.

  1. 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