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A Baltic Cloud on the Horizon

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Investors are watching the Baltic Dry Index (BDI) with a cautious eye. Historically, it's been a great indicator of general economic strength -- but now, that premise seems less certain.

Why it makes sense
The BDI measures the rates big charter ships charge to transport everything from fertilizer to iron ore. As it has dropped by about 60% in just the past month, it's gained the attention of macro-driven investors. Companies like DryShips (Nasdaq: DRYS  ) and Excel Maritime Carriers (NYSE: EXM  ) are heavily affected by the rates they can charge, so it's no shock that both of these companies have seen their share prices plummet by more than 30% over the last six months. According to The Economist, shipping costs were $48,000 per day in May; now they are down to about $18,000.

This can be a reflection of what's going on with global growth; the U.S. recovery seems dubious at best, Europe is nagged by fiscally irresponsible members of the EU, and China's rapid growth looks to be slowing. In fact, China's imports of iron ore and coal fell by 9% and 8%, respectively, in June, which will no doubt affect some of the biggest players in that industry, such as BHP Billiton (NYSE: BHP  ) and Vale (NYSE: VALE  ) .

A possible silver lining?
However, some optimists don't think we should be giving such significance to the BDI -- at least, not in the sense that we're accustomed to. The massive drop in prices could owe as much to an excess in ship supply as to weak demand. In the first half of 2010, the global fleet increased by 23%, or 16 vessels per month; now there are about 23 ships coming off the assembly line each month. Paragon Shipping (NYSE: PRGN  ) , for instance, has recently entered into contracts for four drybulk vessels of various sizes. Apparently, the big shippers aren't seeing the doom and gloom that the rest of us are.

Drybulk shipping aside, container-shipment rates have been holding stable. That's probably why drybulkers like Diana Shipping (NYSE: DSX  ) and Genco Shipping & Trading (NYSE: GNK  ) have both gotten into the container game recently, adding big ships to their fleets. Furthermore, according to the International Air Transport Association, air freight is up by 34% in May from last year's levels.

The Foolish bottom line
It's hard to be sure whether the BDI's massive drop is a foreshadowing of things yet to come, or whether it's been overhyped as an a roadmap toward disaster. One thing is for sure, though: The big drybulk shippers are trading for incredibly cheap prices. Dryships, Paragon, Diana, and Genco are all trading below 11 times earnings, and most are in the low-mid single digits.

What do you think -- is this a great time to buy shipping companies, or is there a reason their prices are dirt cheap? Sound off in the comments box below!

Jordan DiPietro owns no stock mentioned above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2010, at 4:00 PM, KanataMark wrote:

    How about providing some positive information on the shipping companies and their outlook during difficult economic times. If you can't say anything positive don't say anything at all!

    Given the current financial industry induced recession there is very little credibility in the financial industry and economic/financial pundits.

  • Report this Comment On July 22, 2010, at 1:11 AM, nemo1107 wrote:

    Paragon has also gotten into the container sector, getting rid of two dry-bulk ships in the process.

  • Report this Comment On July 31, 2010, at 1:59 PM, brigidl wrote:

    Fools are renowned for long term investing. Getting shares in good businesses on the cheap when all are dumping them is sound ling term investing

  • Report this Comment On July 31, 2010, at 2:42 PM, ragedmaximus wrote:


  • Report this Comment On July 31, 2010, at 2:46 PM, ragedmaximus wrote:

    shipping industry is sinking faster than a pirate scuttled boat in the gulf of aden

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