Have we seen the bottom in the dry bulk industry? This is what people were heard saying when the Baltic Index shot up from 916 points to 1100 points in three weeks time (Nov. 7 - Nov. 28, 2012). However, the surge in BDI did not last long. The index has declined 30% in the last three weeks. In spite of that, the market seems confused about the performance of the dry bulk industry as the Chinese Purchasing Manager index (PMI) is moving in an opposite direction. By this, I mean that the Chinese PMI is on a rise which shows (apparently) that the Chinese economy is recovering. Now the question is: Which figure should the market look at: The Chinese PMI or the BDI? This decision will help them to decipher whether the dry bulk industry has bottomed or not.
The Baltic Dry Index (BDI)
The chart shows that the BDI has been falling mercilessly. The BDI is composed of the Baltic Capesize index (BCI), the Panamax index (BPI), the Supramax index (BSI) and the Handymax index (BHI). The following chart shows the rates for different vessels:
Source: RS Platou
The graph clearly shows that the BDI has been hit by the sharp decline in the BCI. In my previous article on the BDI, I mentioned that the BCI was rising on a "temporary basis" because China always accumulates stocks of iron ore before the start of the Chinese New Year.
It will be important to analyze when this "free fall" in the BCI will come to an end. We can have a rough idea from the fact that the BDI was at 662 points on the 14th of September, 2012, when the BDI started to climb (because of the Chinese stock piling). Therefore, we can expect more decline in the BDI (currently 743 points) until it reaches that point.
The BCI was at 3490 at that date. A crude estimate tells us that the BCI (currently at 5,617 points) still has another 2,000 point to lose before it stabilizes.
The bulls argue that the BPI also saw an increase in the same period (September - October) and has not seen a return as of yet. Therefore, the BDI might not crash below 700 points level.
However, I expect the BPI to decline as well. Christmas is approaching in big leaps and most traders are trying to cover as much business as possible in order to take a breather. This has pushed the market down for all routes except the Atlantic. The fact that the Atlantic route is longer as compared to other routes has prompted a strong interest in it as the ship owners want the long duration to give them business over the quiet holiday period. Therefore, once the holiday season is over, the BPI is expected to fall.
Is the Chinese PMI on a rise?
A key gauge of the manufacturing activity in China, the Chinese PMI is on a rise, giving hopes to the market that the growth is recovering in the second-largest economy of the world. The following chart shows the data for the PMI over the last twelve months:
(The figure for December is a flash number)
We can see that the PMI is on a rise after the month of August. However, people are not realizing the fact that the PMI is still well below its historical averages. Therefore, the growth in the economy may not be strong enough to bring a recovery in the dry bulk industry:
The following chart also shows that the PMI level is well below the peak that it once achieved in 2010.
Dry bulk Shipping Stocks
Now that we have reached a conclusion that the dry bulk industry is far away from a recovery, we need to see how a downfall in the BDI (due to a decline in BCI and a potential decline in the BPI) will affect different dry bulk shipping stocks. The following chart shows the exposure of different shipping companies to different vessel types:
We already know from our previous article on dry bulkers that Genco Shipping (GNK) and Baltic Trading (BALT) are the only two companies that are "directly" exposed to the BCI. Most of GNK's Capesize vessels operate on an index-based system. BALT is a pure-play on the BDI given that all of its ships operate on spot charters.
A potential decline in the BPI will directly affect the revenues of DryShips (DRYS) given that 75% of the Panamax vessels owned by DRYS are operated on spot charters. GNK's revenues will also be affected, given that the company operates its Panamax vessels on an index-based system.
On the other hand, the revenues of Diana Shipping (DSX) and Navios Maritime (NMM) will not be directly affected by the decline in the BDI. Both companies operate their Panamax vessels on long-term charters. FreeSeas' (FREE) revenues will also be safe from the decline in the BCI/BPI given that FREE does not own a Capesize/Panamax vessel.
However, we all know that a decline in the BDI is harmful for all the shipping stocks in the long-run (whether they operate their ships on spot charters or not).
On a concluding, note I would suggest the investors to look for some other catalysts that will indicate a recovery in the Chinese GDP growth rate. For the time being, I remain bearish on the dry bulk industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.