Historically, there have been a variety of factors to look for that directly affect shipping rates and the fortunes of companies such as DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX), Safe Bulkers (NYSE:SB), Baltic Trading Limited (NYSE: BALT), and Star Bulk Carriers (NASDAQ:SBLK). Most analysts, executives, and investors are laser-focused on iron ore demand and production figures as they predict where the dry shipping market is heading. However, Castalia Advisors offers a new indicator that challenges analyst expectations.
An example of common sentiment
A summary of a report by Global Hunter Securities echoes what many experts are claiming about dry shipping. Global notes that rates have been decimated so far in 2014, citing for example that Capesize ship rates have fallen from around $40,000 to $10,000 per day, a decline of 75%. The firm believes there are a "multitude of factors [it] sees evaporating by mid-February." For DryShips as an example, Capesize rates daily rates don't affect them directly, but lower Capesize rates puts downward pressure on smaller ship rates which does negatively affect DryShips.
Global notes that terrible weather inland had stopped and slowed vast shipments of iron ore and coal from making their way to ports. This bad weather is common in the December through January time frame and gets magnified by the Chinese New Year celebration. That tends to result in an annual reduction in economic activity.
Dry shipping stocks on average fell 14% in January, Global adds, and the firm believes it resulted in an opportunity to buy. The holiday season will soon end as well will the storm season on two continents, and Global believes rates and the dry shipping stocks will rise. In Global's summary, it didn't mention any specific names other than to say "the equities," but names such as DryShips which are directly affected by the daily spot rate would fit his implication.
The Castalia Advisors perspective
This group believes an improvement in rates and stocks is not as simple as Global makes it out to be. Castalia is of the opinion that the foremost determining factor is "now more of a function of Chinese credit markets and the People's Bank of China ("PBoC")". The PBoC and credit markets, Castalia implies and explains, has been artificially holding demand out of China. Shipping expert Jay Goodgal went into detail about this two months back.
Basically Castalia recommends that everybody follow closely the economic policies out of China because the domino effect from them will make or break the entire dry shipping market for the foreseeable future. As an example, he cited the "Unofficial Economic Stimulus" from the China Development Bank back in August. From there, credit became easy again which led to massive quantities of iron ore being ordered and a sharp rise in shipping rates. Now that the effect seems to have worn off, Castalia reasons, another stimulus will be needed to get shipping rates going again.
Foolish final thoughts
Castalia does admit that a strong grain harvest out of South America could reduce its negativity, but it believes that's the only other event to watch for and even relying on that one has a risk. In Argentina the peso has been crashing compared to the U.S. dollar so the farmers there have an incentive to delay grain shipments because delaying could result in getting more U.S. dollars after a rebound in the country's currency. Fools should follow the economic policies out of China closely. Castalia could be wrong and Global could be right, in which case rates would rise anyway whether there is stimulus from China or not. However, what they both agree on is that if there is in fact economic stimulus out of China, rates should have another surge, as will the stock prices of dry shipping companies. So if you learn of a new stimulus out of China, be ready -- it should mean "game on" again for dry shippers.