The Baltic Dry Index Gets Moving

The Baltic Dry Index, an index that follows the cost for cargo and goods traveling by sea. During its heyday, it was approaching 12,000 and now it is almost 90% lower. This is usually a good guide to how much demand there is for the global economy and works rather well as a coincident indicator.

Notice how it turned down recently in a time when some stocks that usually track it are moving up (Excel Maritime (EXM) to be exact). But one of the interesting points here is that the index started to move higher during the first part of 2009, stoking the idea that global demand is revving higher.

At the same time, we are finding the there are hundreds of ship contracts being canceled around the world and empty ships are filling up the harbors in and around Asian countries. This is clearly a sign of overcapacity and well backed up by the decline in vessel costs beginning March 1, 2009.

Looking at the longer moving averages shows a continuation of a slide and only the 50 day average is moving higher. We would like to see the average turn higher and the index tick above the January highs in order to see this as a recovery trend that has good investment qualities. In other words, this recent move by EXM seems to be out of sync with the index. Cost cutting? Something else?

(Click on chart to enlarge)

Below are a few of the shipping stocks that usually follow the Baltic Dry Index. DRYS has been following the index rather well, but as mentioned, EXM is breaking out on a good earnings announcement.

Comments

[Infinite loop:]

Ever heard of Behavioral Finance?

There are much larger influences at work here than just the BDI.

I might add that waiting for "good investment qualities" usually means you are very late to the party. I will be selling to you when you are ready.

Apr 14 10:55 AM

[poor&unempl...:]

The Baltic Dry Index, an index that follows the cost for cargo and goods traveling by sea.
----------------------...

Another EXPERT giving opinion on BDI without knowing the underlying components.

God help America!

Apr 14 12:02 PM

[auto44:]

Poorly stated sentance dosen't mean the author dosen't understand the subject. Expert? I guess you are one!!!!!!! How about some useful information then. Anyone can produce negative comments.


On Apr 14 12:02 PM poor&unemployed wrote:

> The Baltic Dry Index, an index that follows the cost for cargo and
> goods traveling by sea.
> ----------------------...
>
> Another EXPERT giving opinion on BDI without knowing the underlying
> components.
>
> God help America!

Apr 14 12:40 PM

[Rohan C. Pease:]

Contnago Contango, it is temp. replacing demand for shipping containers as the BDI starts to push up. Also, this whole space has seen debt covenants broken and then mended with their banks. EXM hit lows because of the worry over debt, now that it has been renegotiated, that is why your seeing the move up.

Apr 14 02:55 PM

[ramisle:]

The BDI is strictly Bulk, no contango, no containers. It is, Iron Ore, Coal, Grains, Cement, Fertilizer, etc....
The BDI is not a fair barometer for the economy. The world could recover and grow by 8% which would be considered great, but since the worldwide fleet is expected to grow by 10% or more, the BDI will be stagnant.
The BDI also reacts to posturing between CISA and the Miners during Iron Ore price negotiations.
It is possible that EXM is trading higher based on relief that it won't go bankrupt, but the earnings weren't good. The analysts don't consider "Amortization of below market charters" to be the kind of revenue that will sustain them. It isn't the kind of revenue that you can take to the bank to help with the loan covenants. If it was real cash, they wouldn't have had to sell shares to insiders for $1.75.

If the market likes it, then it is what it is, but it wasn't a Beat.

Apr 14 05:36 PM

[Mark Anthony:]

To understand the moves of the Baltic Dry Index, one should read this article a while ago:

seekingalpha.com/artic...

One must understand that the supply/demand in dry bulk shipping has a unique characteristics that when demand exceed capacity, it could dry BDI to sky high as it is extremely hard to increase capacity beyond the maximum. But the opposite is not true. When demand is weak, the shippers are very flexible in reducing capacity to meet weakened demand, by doing a number of things:scrapping old ships, spend more time in maintenance and repair, sail at slower speed to save fuel,etc, etc.

Apr 15 03:32 AM

[Rohan C. Pease:]

Yes, commodity prices, especially the rally in base metals is clearly indicating a recovery.

Ramisle- I understand that EXM is a dry bulk shipper, however they are still correlated to moves in FRO(oil cotainers), when contango spreads widen, demand for all containers will go up, driving the space up, hey you could use DRYS, Nordic, pick whichever. Shippers have outpaced the BDI because they have renegotiated their terms on their debt. I would like to see some go bankrupt, take a lil capacity off the market, because fleet expansion is a valid concern.

Apr 15 03:52 PM

[Chris B:]

I took a cruise on ESEA a while back and decided the waters were a bit choppy for me, so I sold out at breakeven.

Revenues for bulk shippers are totally dependent on an index that nobody seems able to adequately predict. The best information I've seen has been anecdotal accounts of ships being scrapped or new orders being cancelled. An evidence-based case is lacking. The application of technical analysis to the BDI makes about as much sense as a 50 day MA on U-haul rentals. The BDI and bulk shippers are little more than a leveraged bet on the return of the commodity bubble PLUS shipping shortage.

The likelihood of both of those situations occurring again - simultaneously - seems fairly low. The likelihood of EITHER occurring seems low for the near future unless you're counting on one whopper of a summer recovery.

Apr 15 05:09 PM

[Timmothy Posey:]

I've held EXM from $6 and rode is all the way down to $3 and now back up to $7.50. I'm selling calls on it because I'm bearish on the overall sector. I think this whole sector will get sold off once we realize this whole idea of "green" shoots was fake.

Apr 15 07:00 PM

[poor&unempl...:]

Auto

It is not a poorly stated sentence. It is lack of understanding. IMHO unless someone who can explain what BIFFEX stands for, should not be writing about BDI. Now go figure that! Let me know what useful information you need about shipping industry and I will try to give it if time permits.

Most if not all the publically held shipowning companies have defaulted on the mortgages. They are living on a borrowed time like any homeowner, who hasn't made a mortgage payment for six months and has received foreclosure notice from a bank. Exact date when he would be evicted is not known but one thing for sure, he will get evicted sooner than later.

This is not a negative comment. It is a made to warn the unsuspecting investors. Cheerleading should not be a oneway street, when it involves people's hard earned money. I do not have anything to sell or anything to gain. Check my other comments - they are consistant.

On Apr 14 12:40 PM auto44 wrote:

> Poorly stated sentance dosen't mean the author dosen't understand
> the subject. Expert? I guess you are one!!!!!!! How about some useful
> information then. Anyone can produce negative comments.

Apr 16 02:56 PM

[nobby73:]

Whilst the extremely high levels of the BDI at the end of 2007, start of 2008 were indicative that the imbalances in the global economy were reaching a critical point, there are many misleading factors. Firstly, the index represents current prices to travel specific routes. There was a bottleneck in many ports, meaning ships sitting waiting to load and unload or simply sailing more slowly, which increases the charge (BDI is cost for a trip, so the longer it takes, the more they charge). It was a marginal cost, i.e. many shippers had agreed longer term contracts and with capacity scare, the price at the margin therefore higher. The interesting feature of the shipping market was that dry freight was moving from South America, Australia etc, with the ships returning empty on the way back and container ships transporting good from China to America but going back empty. This distorts the price of BDI as the cost needs to cover the empty return journey. We've also seen a big increase in use of rail networks (esp Russia) to transport by land to a port and then using handymax sized vessels (which are easier and quicker to build) to complete shorter journey by sea. I was involved in a couple of projects working with dry bulk shippers at the beginning of 2008 to find out if they could lock in the high prices, but the truth was nobody expected the levels to stay high, so people didn't want to lock in the levels over a longer term but would pay the current level as and when they had to and wait for the market to turn.

Overall, BDI is fascinating and generally misunderstood. Shippers believe it works on a long term cycle, but it's only when it gets to extremely high levels should we be tempted to read too much into it.

Apr 17 04:56 AM

[Rohan C. Pease:]

DRYS raised capital, upgrade at Oppenheimer, whole space up!!!
Dry bulk shipping index has a P/E of 4, still room to go!
Dry Bulk shippers outpaced S&P 500 by 12% in last month, this is a leading indicator, the economy is stabilizing.

Long EXM shares.

Apr 17 12:47 PM

[einstein p ...:]

I own and trade EXM, along with a few other dry bulk shippers. I bought EXM is the high 3s and sold half of the position after they recd financing from the bank. I expected a pop and a retest of the lows, which never happened. Even at the 7 level, the stock is a good long term hold. That said, I prefer PRGN, which yields 5%. It may not have the upside of EXM, but it does have room to move higher and you get paid to wait.

Apr 19 01:38 PM

[MarcV:]

Maybe al of us should be looking at weekly charts not daily, as we all get too hper-confident or gloomy with 2 day moves in either direction Look where commodity prices have dropped since this original post on april 15th. Its sickening. We are still in deflation boys, like it or not. I pray the bottom is near. But.....even if it is, we can stay at bottom like a rock...for many months. Then and only then when al the money the fed is printing gets distributed.......but wait....these arent normal times...for anything! But normally we should be seeing massive inflation by next year, with no major wars breaking out, God forbid.


On Apr 15 03:52 PM Rohan C. Pease wrote:

> Yes, commodity prices, especially the rally in base metals is clearly
> indicating a recovery.
>
> Ramisle- I understand that EXM is a dry bulk shipper, however they
> are still correlated to moves in FRO(oil cotainers), when contango
> spreads widen, demand for all containers will go up, driving the
> space up, hey you could use DRYS, Nordic, pick whichever. Shippers
> have outpaced the BDI because they have renegotiated their terms
> on their debt. I would like to see some go bankrupt, take a lil capacity
> off the market, because fleet expansion is a valid concern.

Apr 20 11:40 AM

[einstein p ...:]

Cargo and goods? We are talking about dry bulk shippers, right? As far as seeing companies go bankrupt to take capacity off the market, I guess that's one way to go. Personally, I'd rather see an improvement in the global economy.


On Apr 15 03:52 PM Rohan C. Pease wrote:

I would like to see some go bankrupt, take a lil capacity
off the market, because fleet expansion is a valid concern.

Apr 20 04:14 PM