Tuesday, June 17, 2008

The Collapse of the Baltic Dry Index

My last update on the Baltic Dry Index was on May 17th 2008, Baltic Dry Index Soars Due to Quake Factor!

The Baltic Dry Index then was 11,459 points.

However things have not gone rosy for this sector since.

Last night the Baltic Dry Index was at 9419, down some 227 points or 2.3%.

And the following chart shows the terrible plunge in the index.

Trouble started on June 11th 2008.

  • Drybulk index posts largest-ever 1 day drop
    Key drybulk index posts largest-ever 1 day drop as demand sinks for largest drybulk vessels
    June 12, 2008: 03:03 PM EST

    NEW YORK (Associated Press) - A key shipping index measuring drybulk vessel activity posted its largest one-day drop Thursday, dragged down as rates for the sector's biggest ships lost significant ground.

    The Baltic Dry Index, which measures drybulk shipping rates on 40 routes across the world, sank 963 points Thursday to reach 10,142. The index had wavered, but remained above 11,000, since hitting an all-time high on May 20 of 11,793. The index, managed by the Baltic Exchange in London, had previously posted its biggest one-day skid of 443 points on Jan. 17.

    The index's reading for Capesize vessels _ the largest drybulk carriers _ fell 16 percent. The average Capesize vessel now costs about $180,000 per day, compared with prices of more than $230,000 per day last week. Capesize vessels are so named because they are too big to fit through the Suez or Panama canals, and must instead sail around the Cape of Good Hope or Cape Horn to travel between oceans.

    Cantor Fitzgerald analyst Natasha Boyden said in an interview the significant drop was the result of Chinese iron ore importers working through their stock piles of the commodity instead of bringing more into the country. With the huge demand for iron ore, steel and other commodities carried by drybulk ships soaring, Boyden said Chinese importers turned to their own supplies as ports clogged and drybulk rates skyrocketed.

    But Fitzgerald noted that the Chinese only have about three to four weeks worth of iron ore stockpiled. After its resources are used up, Boyden said drybulk ships will again be in high demand to deliver goods to the country.

    "This (pull back) is merely temporary," she said. "Painful, but temporary."

    JPMorgan analyst Jonathan Chappell said in a client note that he expects the Baltic Dry Index to continue to fall through the third quarter,
    as the typically slow period will be compounded by an expected lull in trading around the Beijing Olympics and further draw downs of existing inventory by Chinese steelmakers.

    Although drybulk's decline should not be as significant as the slip seen from November to January, Chappell suggests that investors hold off until a buying opportunity emerges in the fourth quarter.

    In afternoon trading, shares of DryShips Inc. fell $6.44, or 8.3 percent, to $71. Navios Maritime Inc. lost 27 cents, or 2.8 percent, to $9.52, while Danaos Corp. gave up 70 cents, or 3 percent, to $22.83.

    Genco Shipping and Trading Ltd. sank $4.51, or 7.9 percent, to $52.85. Diana Shipping Inc. pulled back $1.17, or 3.9 percent, to $29.

    Excel Maritime Carriers Ltd. retreated $4.21, or 10.3 percent, to $36.60, and Eagle Bulk Shipping Inc. slipped $2.32, or 8.1 percent, to $26.21.

    Euroseas Ltd. fell 27 cents, or 2.1 percent, to $12.92.

Here are some other news clip offering clues to what's happening.

  • Baltic Dry index fall hits shipping cos

    14 Jun, 2008, 0050 hrs IST,Sumantra Das, ET Bureau

    MUMBAI: The Baltic Dry Bulk index, the shipping index barometer for dry bulk vessel activity globally, on Thursday plunged 8.7% on Thursday after China ordered ports to cut iron ore stockpiles, impacting shipping stocks adversely.

    Analysts said the index is down 963 points from its record close of 11,793 reached on May 20, 2008. On Thursday, the index touched 10,142. Shipping Corporation of India lost 3.10% to Rs 244.10, Great Eastern Shipping (GE Shipping) declined almost 4% to Rs 433.40, while Mercator ended flat at Rs 114.25 on the bourses.

    The Baltic Dry Index is a measure of commodity shipping costs. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts commodities on 40 routes across the world. The index, managed by the Baltic Exchange in London, had previously posted its biggest one-day skid of 443 points on January 17, 2008.

    According to a Mumbai-based analyst, the Baltic Dry Index is likely to continue to fall over the next three months. This may in turn impact fortunes of companies such as Shipping Corporation of India (SCI), Great Eastern Shipping and Mercator Lines. He also said that the index’s reading for Capesize vessels, the largest drybulk carriers fell almost 16% on Thursday. Currently, the average Capesize vessel charter rates are ruling at about $1,80,000 per day as compared to more than $2,30,000 per day last week.

    Analysts attribute the fall to China’s attempt to hoard supplies in an attempt to front-load industrial production ahead of the Olympics in August. Additionally, China’s plans to temporarily shut down many factories in an effort to limit pollution in Beijing during the games, is another factor leading to this situation.

    The index takes into account shipping rates over a range of shipping routes for a variety of large vessels that transport dry goods including coal, iron ore and grain around the world. The index is viewed as a proxy for global demand of raw materials. The Baltic Dry Index has surged 88% in the past year, as China’s economic growth fuels demand for steel to make cars, offices and factories.

And naturally the shipping stocks plunged as well.

  • Shipping stocks in Asia plunge

    By Sandra Tsui and Marcus Hand - Friday 13 June 2008

    SHIPPING shares in Asia plummeted Friday morning following the sharp fall of the Baltic Dry Bulk Index yesterday.

    In Hong Kong, China Cosco, which took over its parent’s massive dry bulk fleet in January, was hardest hit. Its stock dived 8% in morning trade to HK$18.06 ($2.3).

    China Shipping Development, which announced a $428m order for eight 76,000 dwt panamaxes this week, lost 6% to HK$21.45 by the end of the morning session.

    Its affiliate, China Shipping Container Lines, although a container liner operator, was dragged down by poor sentiment and shed 4.6% to HK$3.12.

    Shipping analyst Stella Kei from securities house UOB Kay Hian Holdings said the June to August period is traditionally the low season for bulk shipping as volumes of steam coke and grain shrink and port congestion ease, but the sharp fall of the BDI yesterday shocked the market.

    Another factor contributing to the poor sentiment was that the lock-up period for the Shanghai-listed A-shares of China Cosco is due to end in two weeks.

    The more resilient shares so far are handysize specialist Pacific Basin, whose shares fell as much as 3.6% to HK$10.7 apiece. They recovered slightly to HK$10.86 by the close of the morning session, but were still down 2.2% from yesterday’s closing.

    Junhui Holdings, with most of its vessels being supramaxes, lost 2.6% to HK$4.56 a share.

    “Pacific Basin has already locked its profit this year and the company will record special income from vessel sales earlier this year, it is thus less affected by the BDI fall,” said Ms Kei.

    On the Singapore Exchange, shares in one of the world’s largest dry bulk owners and operators, South Korea’s STX Pan Ocean, fell 8.3% to S$2.77.

    In Thailand, despite rates holding up for smaller-sized dry bulk vessels, shares of handysize and handymax specialist Thoresen Thai Agencies fell 7.4% to Baht40.50, while Precious Shipping was flat at Baht22.60.


Locally, Maybulk is the leading stock in this sector. Maybulk closed at 3.74 yesterday.

Right now, recent buyers of the stock purchased it because the Baltic Dry Index was soaring again. However, this very reason to buy the stock is no longer valid. As an investor, as a trader or as a speculator, how would you justify your position now?

OSK had a report yesterday.

Naturally some are not pleased at the way the report was made.

Randomly heard on a chatbox. "bdi go up they say wow earnings will rise. bdi crash they say nvm still got dividend can buy."

I can understand the displeasure. It's like no matter what happens, the recommendation is always a BUY.

And at this moment of time, I really do have to give credit to Chris Perruna. On my May 14th 2008 posting, Dryships, Maybulk and Dry Baltic Index (BDI), despite the incredible surge in the Baltic Dry Index, Chris wasn't a buyer of stocks in this sector! ( DryShips (DRYS) Drying up?. )

Let me quote what he wrote back then.

  • All in all – I am not a buyer of the stock at this level. It may be a solid short term buy for traders that make these types of plays such as Blain and Rajin but it does not fit into my criteria for a trend trading opportunity. A challenge of new highs or a push into new high territory will change my perspective of the stock.