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
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
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
Drybulk shipping aside, container-shipment rates have been holding stable. That's probably why drybulkers like Diana Shipping
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!