Monday, September 08, 2008

Views On Current Weakness On Baltic Dry Index

Got the following notes from Kenanga Research on Baltic Dry Index.

  • Shipping – dry bulk Choppy water ahead?

    Testing previous low? After tumbling 52% from the May 2008 peak of 11,793, the Baltic Dry Index (BDI) looks set to test the previous lows of 5,615 in Jan 2008 and 5,254 in June 2007 while trading at 5,663 during the time of writing.

    Accident and deaths to affect Australian iron ore production. On 3 Sept, Rio Tinto declared force majeure on some iron ore shipments after an accident where a rail car damaged one its ore dumpers at an Australian port. Though the repair is underway, it is believed that the dumper will be out of service for the next 2-3 weeks. This was followed by the closure of BHP Billiton’s Australian iron ore mines on 5 Sept 08 with the death of 2 mine workers in the Yandi mine within a short span of 10 days. Reuters reported that BHP has resumed its Australian iron ore mines on 6 Sept but the Yandi mine remains shut pending investigation on the deaths. The Yandi mine accounted for c.40m MT of iron ore production or roughly 4% of the global traded market.

    Vale calling for a price hike?! It was also reported on 5 Sept that Brazil's Companhia Vale do Rio Doce, the world’s largest iron ore miner had notified some Asian steelmakers that it intends to seek a 20% iron ore price hike effective 1 Sept . While Vale refused to confirm the 20% price increase, Chinese steel mines have rebuffed the hike, indicating that Vale’s demand is unacceptable.

    More uncertainties for dry bulk . Though Rio Tinto and BHP’s mines should return to normal post repair and implementation of better safety measures , the potential price increase by Vale has added much uncertainty to the dry bulk in the short term. According to certain contract terms, Vale may hold back up to 10% of contracted iron ore amount to be sold on the spot market. Coupled this with the weakening demand for steel where major Chinese steel producers such as Nanjing Iron & Steel United which has started to cut production and the high iron ore inventory in Chinese ports at c.60m MT or 1 month ’s consumption , Chinese steel mills may reduce Brazilian’s ore shipments to protest against the price hike. The dry bulk might suffer further should the overhanging pricing issue is dragged on. Moreover, Chinese steel mills might switch to procuring more sup ply from Australian mines, reducing tonne per mile demand further.

    Maintain our view that dry bulk rates would be firmer in 4Q08 coinciding with peak grain export season for the Northern hemisphere . Near term BDI performance however is likely to be volatile and will hinge on Chinese steel mills’ reaction to Vale’s call for higher ore price. Investors should reduce exposure to the dry bulk sector on the next leg up in 4Q as looming large deliveries come on stream from 2009 onwards outpacing demand.

Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index

2. Goldman Downgrades Bulk Shippers!

3. Baltic Dry Index Keeps Falling!

4. Baltic Dry Index Stages Strong Rebound!

5. Baltic Dry Index Set For Strong Recovery???

6. Baltic Dry Index Plunges To Seven Month Lows!

7. The Baltic Dry Index Keeps On Plunging!