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Monday, May 25, 2009

Baltic Dry Index - Recent Buy Signal Indicates Demand Marginally Firmer

Saturday, 23 May 2009

The Baltic dry index reached its highest level in 2009 last week. It produced its second long term buy signal off the bottom which follows the relative strength buy signal given in February. The move belies the pessimism displayed amongst the ship owners and industry investors. It is important to realize that buy signals tend to stay in place for an average of 2 years on individual stocks, but the Baltic Dry Index is not a stock. And we know how volatile it has been. While the Index itself consolidated its bounce off the February bottom, it never did give a relative strength sell signal. Amazingly, the index has continued its move higher and could potentially reach 3,000.
Fundamentals have recently strengthened somewhat on the supply, demand and liquidity fronts.
The latest available figures suggest that the expected new ship delivery schedule will continued to be delayed and/or canceled, while the scrapping of older vessels continues unabated. The result will be lead to record tonnage being dismantled this year.
The actual demand for cargo emanating from China (the loan bright spot right now) is open to debate. On one hand, China imported a record 34.6 million tons of iron ore in 2009's first quarter. Their need to replenish depleted inventories surpassed the old record of 28.19 million tons in Q4 2008.
On the other hand, most other global regions have been dormant, especially Japan, in the purchasing of most of the basic resources. Coal remains a bright spot, both metallurgic and bitumen. Grains have been strong as well.
Possibly the most important to the performance of the shipping equity universe is the increasing liquidity options opening up for the ship owners. Certainly to the behest of their bankers, owners are floating stock to the public, diluting shareholders, but allowing balance sheet repair to commence while buying time for improving cash flows as day rates firm.
As always, pay attention to what current chart action is signaling about sector fundamentals.
Source: Bruce Zaro, Green Faucet