Thursday, January 15, 2009
Dry Bulk Shipping: Recent BDI Rise Is Heartening
Thursday, 15 January 2009
Clearly DRYS stock bottomed at the same time Baltic Capesize Index bottomed. It has been rising ever since. The Chinese are the main reason for this. They use a lot of Capesize ships because they import huge quantities of materials. They were holding off importing iron ore (and coal as a consequence) at the end of last year. This was partially due to the recession, and it was partially due to the fact that they had year long price agreements for iron ore in place at higher prices than they wanted to pay. With the advent of the new year, the Chinese have started importing more. They have to in order to make their stimulus package work. The amount of shipping is still below the highs of last year, but it is clearly rising. The Chinese are starting to buy more now because their supplies are so low, although the new price agreements are not yet in place. The Chinese are trying to negotiate for an iron ore price, which is generally expected to be about 40% lower this year. They are trying to negotiate it retroactive to Jan. 1, 2009. This would make all of the iron ore they are buying now cheaper. I cannot say whether they will succeed. However, it seems likely that they will want to conclude the negotiations quickly so that they can be sure of their actual costs for iron ore this year.
The shipping is ramping up. The stimulus package, which is infrastructure heavy, should cause them to import at least as much as they did last year (perhaps more). There may not be as much iron ore. However, the steel they will need for many of their infrastructure projects should compensate to some degree for the steel they will not need for the depressed steel industry market. Metallurgical coal is linked to iron ore, and fuel coal is increasing in use in China for electricity and “coal to diesel” plants.
The stimulus package will likely cause the Chinese to import more than normal amounts of copper ore (for wiring and copper piping), bauxite (aluminum), concrete, cement, wallboard (not sure if this is a dry bulk item), lumber/timber, etc.
I am sure I have left out other important Dry Bulk items, but you get the idea. This should overall be a boon to the Dry Bulk Industry. They tend to use the biggest ships, so the capesize carriers should benefit the most. However, the Panamax carriers will either be dragged up eventually or the availability of Panamaxes for cheaper rates will start to hold the Baltic Capesize Index down.
The Capesize index has rebounded from a low of about $2000/day to its current price of $15,235 today. The Chinese were definitely a huge factor in this. They imported 32.5 million tons of iron ore in Nov. 2008. Then they imported 34.5 million tons in Dec. 2008. Apparently some of this ore came from far away Brazil, which partially accounts for the increase in demand in shipping. It seems likely the demand will increase further as more material is imported once the price agreements are in place. Also the other dry bulk items mentioned above will likely come soon after the iron ore.
Since a lot of companies have long term charters, you might wonder why the rise in the BDI is important? As an answer, one might conjecture that the importers, such as China, would try very hard to renegotiate long term charter agreements if the spot prices stay low for a prolonged period of time. Even for those companies with long term charters, the rise in the BDI and BCI are very good news. For those companies with unchartered ships, the rise is even better news, especially when accompanied by an increase in shipping demand.
I expect that the Baltic Cape Index will continue to rise in the short term. I expect the other indices, especially the Panamax Index will begin to follow it more closely soon. This should be a true boon to the shipping industry. Companies that are heavily leveraged will be the most relieved, since they will be the ones most worried about surviving the recession. These companies such as DRYS and EXM, which also have the best Price to Book value ratios (i.e. are arguably the best value plays and actually growth plays), should benefit most in stock price form the increases in the BDI and its sub indices.
I believe the China infrastructure heavy stimulus package, plus the still excellent growth in China (about 8%, but some say falling to 6%), should lead to another overall increase in China’s Dry Bulk shipping this year (even taking into account the downturn in the worldwide steel industry). When the iron ore agreements are finally signed, we should see a surge in shipping, which may surge again later with the addition of building materials items (or raw materials for them). In addition China is apparently planning to add to their stimulus efforts in the March time frame. This should help further.
Good luck in the markets. They are a challenge these days.
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