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
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
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.
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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.