Baltic Capesize Index Surges: A Step Towards Industrial Recovery?

There has been and continues to be a lot of news and analysis about the Baltic Dry Index, BDI, which tracks the cost to ship dry bulk goods. Many “investors” have been using the ups and mostly downs to decide whether to buy or sell a host of shipping companies, whether they are in the dry bulk business or some other shipping business.

One of the subset of Baltic indices is the Baltic Capesize Index, BCI, which tracks the shipping costs on the largest of the dry bulk ships, the Capesize. Capesize vessels are those in excess of 80,000 dwt and primarily carry coal and iron ore. The BCI then tends to fluctuate with the amount of steel being produced.

The BCI spent most of the last year between 8,000 and 19,000 before it started to fall precipitously in early September. The ride was straight downhill and the index bottomed at 830 on December 2. Over the last two weeks, however, the BCI has been on a run, increasing 80% to close yesterday at 1,514. Over the same two weeks the broader BDI has increased just 21%.

The BCI is increasing on the hope that the Chinese steel industry will start ramping up again. Iron ore contracts are being renegotiated at closer to the current market prices and if the ore producers give up some pricing they will surely see an increase in volume. There will be a string of Capesize dry bulk ships from South America to China.

I have read quite a few articles indicating that the BDI could be a good leading indicator for an industrial recovery. I thing the BCI may be a leading indicator for the BDI. Do not forget that these indexes are still off 80% from their recent trading ranges and the shipping companies in the spot market are not getting rich, they are just not going broke as fast. That said, continued strength in the BDI and BCI will raise investor interest in shipping companies across the board. Here are the shipping companies I am tracking:

• Genco Shipping & Trading (GNK) Leases its fleet of dry bulk ships on longer time charter contracts contracts. In the 3rd quarter it had daily equivalent revenues of $39k per day and vessel expenses of $4,700 per day. The $1.00 quarterly dividend may be at risk, but the company has been paying out only 50% of net income.
• Ship Finance International (SFL) Does long term, bareboat charters of tanker, cargo and offshore ships. Revenues and 20% dividend appear to be very secure. A gain in the BDI will definitely help the share price.
• Aegean Marine Petroleum Network (ANW) is developing an expanding network of fueling stations and bunker tankers to provide fuel to all types of shipping. The revenues and earnings of ANW have little or no relation to the BDI, but the stock price will be boosted if the Baltic Indices continue to rise.

I will be watching the BCI to see how far it can continue to run.

Disclosure: GNK and ANW are components of my site’s hypothetical Opportunities Portfolio. SFL is in the Income Portfolio and a personal holding.

Comments

[coprophagous:]

Dont get carried away by the BDI index, it is a good barometer on the way down because it represents the highest of a few actual fixtures. It is not so good on the way up as the highest rate of a few reported fixtures does not represent the vast majority of the market.
There are over a hundred large dry bulk carriers sitting empty and another hundred or more to deliver in the next 12 months.
China continues to release information that shows their economy is contracting with exports off 30%+ and manufacturing down 50%+ in southern China.
The collapse of a significant ore company in Australia today and the reports from steel mills and iron ore miners points toward a much weaker spot market for dry cargoes and period fixtures do not meet the economics of ship prices which form the few reported sales indicate a 60%+ decline from those of the last couple of years.

2008 Dec 17 11:18 AM

[elliot_mllr:]

According to today's LLoyd's List, 50% of the prospective newbuild dry bulkers due for 2009 delivery won't be built, so the 100+ to be delivered in the next 12 months won't be.

2008 Dec 17 02:31 PM

[Darburro@ya...:]

I am going to disagree a bit with our friend coprophagous. The writter of the article is correct when he states that companies like Genco have their fleets out and working - over 95% are signed up for at least the next 6 months if I am not correct and well over half of Genco's fleet is signed up for the next 18 months. As for the new ships he states that are coming on line - I question that number as well. Brownfield shipbuiding yards are just not being built because they could not get financinig so those orders are canceled. On top of that, ship companies who have signed contracts for ships are canceling those contracts because they cannot get credit or they just see this as the wrong time to be buying new product, so that takes another chunk of new ships out of the equasion. The ships that are left, outside of Genco, Diana, Eagle, Dryships - the big players who have mostly young fleets, are old and are not as efficent to operate. They would start scrapping these old ships but again - no credit to buy them on the part of the scrapyards and the price of scap right now is low because of low demand for steel.
The BDI just could not go much lower. We know the Chinese were playing games last year after the Olympics - in my view they were sticking it to Vale for attempting to raise ore prices by a further 10% in the middle of the already agreed upon contract that already had signifigant price increases. I read an artilce a few weeks ago that Vale had recinded the price increase and they were agreeing to ship the ore to China at their cost. The Chinese will not be played for chumps again and they are showing that they will pay reasonable amounts for ore - and if not, they are not adverse to shutting things down until costs fall back in line. Last fall was a cannon shot across the bow for the ore manufacturers to let them know who is in charge and to not be so damn greedy and that maybe why the ore provider in Australia that coprophagous mentions in his article went bust - caught up in China's power play. Thats my take anyway.
In the end - the Chinese have pledged 500 Billion dollars in economic stimulation NOW and for them that does not mean fooling around with the Central Bank - that means infastructure and jobs. They have to keep their GDP growth above 6% or they end up with civil unrest. Keep the people working and things are at peace. They are building thousands of new mies of railway, they still have to rebuild the area devastated by the earthquake last year - thats hundreds of appartment buildings, schools, hospitals, factories, homes, bridges etc. On top of that, they have committed to build 102 new cities - cities that do not exist now, each city to house over 1 million people, over the next 20 years.
Where are they going to get the ore, the copper, the concrete, the coal etc. to build these cities. Oh ya - by importing the raw materials on Dry Bulk Ships.
The index is moving up and the fact that the ore miners and China have decided to do this years contract 4 months ahead of time shows that things are ready to ramp up slowly.
Will the Drybulk index hit the highs of last May - I personally do not think so - but they will go up. I will be happy if they get to 50% of where they were last May. Many feel the bottom has been hit on the BDI. We shall see.
And finally - those 300 ships sitting in harbour - they are, I am willing to bet, spot charters and they are old ships that under normal economic circumstances, would be headed to the scrapyards anyway. They are too expensive to run and maintain at the present rates. Lets remember - the big players, Genco, Diana, Eagle and Dryships are not spot charter players - they hold long term contracts with the creme de la creme of the charterers, and they will all do well as the Chinese and India in the case of Eagle, start to ramp up production for domestic use. Thanks for reading and a Merry Christmas and Happy New Year to all.

2008 Dec 17 02:38 PM

[Tim Plaehn:]

Darburro, excellent comments and some items I had not considered. If you look at the May peaks in BDI and BCI they were an abnormality that lasted for a few weeks. Over the last year I would guess the average for the indices at about 60% of the peak numbers.

2008 Dec 17 03:16 PM

[yank:]

Darburro:
I have to bellieve your version of the BDI makes more sense than the previous poster (coprophagous). As you so well said China's imperative is to continue their growth at/near a high single digit growth rate. Anything less and it's revolution time as you say. Much if not all of this carnage was due to the "freezing" of credit. It is inconceivable that frozen credit can continue indefinitely. Otherwise we will all end up living in caves.
China's list of infrastructure projects will require enormous amounts of commodities. That should benefit BHP, Vale, and Rio Tinto. You were correct that China had to show those guys who the boss is. What do they say in retailing, "The customer is always right". Vale was incredibly foolish to try to ram a price increase down China's throat (after a signed contract) in the early phases of a global slowdown. Talk about a "brain fart". What were they thinking?
With the USD collapsing as we speak, the fuse has been relit on the commodity supercycle. Nice post.

Yank

2008 Dec 18 02:05 PM

[Gregorian:]

I must say, Seeking Alpha, attracts some well-informed commentators. Thanks for the interesting comments.

I recently went to China for the first time, and must say Darburros comment is spot-on. Without high growth, the Party is doomed. And they are building a LOT over there, and they do it FAST. Even though we see a contraction now in most sectors, the rebound is not far away. And China is not (as far as I know) that quagmired in debt (which is drying up..).

BDI will increase in the near future, and I will take positions to take advantage of that.

(For those interested in SFL, I just wrote another comment on that, linked through my nick.)
Thx.

As

2008 Dec 19 02:34 PM