The Number Every Shipping Investor Must Watch

In Dante's Italian classic The Inferno, the sign marking the entrance to Hell reads, "Abandon all hope, ye who enter here." Unfortunately, this pretty aptly describes the outlook for investors hoping to make a buck from owning shipping stocks as well, as the Baltic Dry Index all too clearly reveals.

The Baltic what, now?
The Baltic Dry Index tracks the prices for several kinds of dry bulk shipping. It monitors those rates across 26 key shipping routes for dry bulk ships that carry commodities such as coal, iron ore, and grain.

Economists and investors monitor this figure to gauge the future direction of the shipping industry and the global economy. From an industry-specific standpoint, shippers become more profitable by charging higher prices for their services. As such, shipping investors carefully scrutinize this figure, using it as a proxy for future revenues. And since higher prices indicate greater demand to move goods from place to place, observers also use this price to glean insights into the strength of the global economy.

The latest numbers
So far this month, the Baltic Dry Index has fallen by 18%. Continuing the index's year-long downward march, this drop demonstrates increasing overcapacity for dry bulk ships coming into service. In fact, dry bulk capacity looks poised to grow by an additional 13% throughout 2011, a figure analysts cryptically regard as "difficult to absorb."

This continued supply growth should drive further decreases in shipping rates throughout the year. Since dry bulk shipping is essentially a commodity service, individual firms take prices dictated by the market. Given all this, expect to see shipping rates continue to fall.

Unfortunately, this industrywide pain should spread to individual stocks. This likely means several more quarters of suffering for investors in big dry bulk carriers like Diana Shipping (NYSE: DSX  ) and DryShips (Nasdaq: DRYS  ) , as well as smaller carriers such as OceanFreight (Nasdaq: OCNF  ) , Paragon Shipping (NYSE: PRGN  ) , and Eagle Bulk Shipping (Nasdaq: EGLE  ) .

The better shipping play
Investors interested in the shipping area might prefer to shift their attention to a better (sea) faring portion of the industry: container shipping. Projected to actually grow by 8% this year, this subset faces none of the overcapacity issues of its dry bulk brethren. This provides container shippers like Danaos (NYSE: DAC  ) and Seaspan (NYSE: SSW  ) with far greater upside as potential investments.

The dry bulk arena should remain pretty cutthroat for the time being. The pain of overcapacity issues will likely only get worse before it gets better. On the other hand, the shipping industry is known for its immense cyclicality. If global demand continues to strengthen in the coming years, this glut could create a buying opportunity at some point. Just don't expect it to happen now.

Want to stay up to date on the future movements in the Baltic Dry Index? Click here to add any of the stocks mentioned in this article to My Watchlist to get the latest news and analysis on your favorite shipping stocks.

Andrew Tonner owns no position in any of the companies mentioned in this article. Motley Fool Options has recommended a write covered straddle position on Seaspan. The Fool owns shares of Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

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 April 27, 2011, at 12:46 PM, psl8er wrote:

    The Baltic Dry Index is in fact several indexes covering different sizes of dry bulk carriers and different routes.

    It is only made up of spot fixtures that are made the day before and reported.

    It could be one ship or several but it does not include time charter rates which form the majority of the trade.

    It is therefore only a small snap shot of the spot market and cannot be relied upon as anything else.

    The market is demand driven and only the expert shipbrokers monitor the cargo volumes and other indicators.

    To look at the BDI as an investment tool is very foolish.

  • Report this Comment On April 27, 2011, at 3:14 PM, psl8er wrote:

    I have a number of problems with Seaspan. Firstly it does not operate a container service but is really an off-balance leasing company for the Chinese container companies.

    Secondly it has embarked on a massive ordering program that will render some of its existing ships obsolete.

    Thirdly it has set up a seperate investment firm funded by Carlyle and other Private Equity firms that is going to invest $1bn+ in new container ships and possibly tankers and bulk carriers.

    So who has ordered the new ships,Seaspan or Newco? and who will operate them?

    Fourthly the Seaspan CEO is going to leave Seaspan at the end of 2012 to run Newco and meanwhile will earna substantial commission on all the funds that Newco invests in ships.

    Surely these commissions should go to Seaspan and will it be competing with Newco for charters for the new ships?

  • Report this Comment On May 09, 2011, at 7:26 PM, rofgile wrote:

    Most shipping investors would be aware of the BDI, what do you have to offer as new information?

    What drives the BDI? What factors in the world (besides too many ships) are affecting this index?

    Do not floods in Australia, and Tsunami's in Japan have major effects? What about China's current state (+ or -)? What about Latin America?

    ---

    These are the details that you should be discussing..

    -Rof

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1482813, ~/Articles/ArticleHandler.aspx, 10/20/2014 5:12:05 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement