BDI Falters; Stocks Vulnerable?

by Skymist

The Baltic Dry Index has now fallen significantly for two days in a row, putting us down more than 10% from its high last week. BDI is a streaky index, almost behaving more like an integral of a boolean function than a quantitive measure.

BDI rises when the shipping industry perceives that there are more bids for vessels than there are available vessels; as soon as the situation reverses, BDI begins falling.

The levels of BDI correspond poorly to constraints in the shipping service itself - the index gladly falls below break-even for operating costs, without obvious support levels showing themselves. It cannot be traded on technicals as if it were a stock.

With shipping stocks lately being supported by speculative expectations rather than earnings reports, a falling BDI can lead to falling stock prices in the short run. I don't feel we can hope for a major reversal of the sector fall until we have had at least one more earnings season.

The market already feels that shipping stocks have risen substantially, though they have only really come back a fractional amount.

The stocks which have had the most sudden run up in prices may be the most vulnerable to erosion while BDI falls. I decided to move to the short side for the time being with FreeSeas (FREE), shorting the stock on Friday at $3.28. I am looking for the price to slowly move back to the $2.80-$3.00 region in the next few days. Despite this, I am still bullish on FREE in the longer term.

Comments

[bfras921:]

ok, lets see if i have this right.

you went short friday, then put out a negative article one day later.

This isnt marker manipulation??

The SEC should look at your tactics

Jun 08 07:06 AM

[Alan Young:]

Good article, very useful.... but "integral of a boolean function" is a little much.

Jun 08 08:35 AM

[buyforeclos...:]

SEC? lofl...ur joking right? SEC won't bust GS after al lthe manipulation on everything...most recent targeting oil at $85 because they blew a call at $50 and trying to get clients money back... imho

no demand for oil yet..should be 50 bucks

Jun 08 10:05 AM

[OsideRes:]

The market cap of DRYS is about $1B. I wonder why isn't a couple hedge funds use about $200 millions to squeeze the short sellers and make 50% gain in a couple weeks? Remember, DRYS just had a contract for $600M for three year. This biz is a high margin biz.

Jun 08 04:32 PM

[elliot_mllr:]

The latest news is that Rio Tinto just made a deal wiith Baosteel and the Chinese steel industry association to sell iron ore to the Chinese steel mills at a 33% discount from last year's price, and it is highly likely that BHP and Vale will follow suit. Once this starts to take hold it ought to enhance the BDI.

Jun 08 05:24 PM

[carlosG1:]

I would have thought that the end of the iron ore contract negotiation this time around would have the opposite effect on the BDI. My reasoning is this: When spot prices for iron ore fell in 1H09, along with a collapse in freight rate, it made more sense for the Chinese mills to import the higher quality ore from Australia than buy the inferior ones produced domestically which were just as costly, if not more (to put in simple terms, the CIF price of Australian iron ores was below the prices of locally produced iron ore). Subsequently, iron ore import demand held up well whilst the local mines ended up shutting down.

For this dynamic to continue, the contract iron ore prices should be discounted as much as possible, and freight rate kept low. The Chinese stated that would keep importing as long as CIF price is kept below 80 dollars/ton. The Chinese were therefore going for a 45% cut with the Australians - which would have put contract back to 2007 level.

But with the Japanese and Koreans mills bailing out of the negotiation table and agreeing to 33% cut (iron ore fines), and the Chinaco-Rio Tinto deal in disarray, the Chinese may have little choice but to agree to a lower than expected cut. Whether or not this new contract price will force the mills to source more iron ore from local mines remain to be seen - but one thing is clear, the more shallow the discount, the less likely the Chinese will import from abroad.

Not arguing that the end of negotiations has little effects on sea bourne trade, but these things are quite complex and I think we need to examine the context closely in order to determine which direction it will go. The 2008 China-Vale negotiation case would serve as an example of the 'BDI enhancement' effect you are referring to. Back in early 2008 iron ore shipment (and hence freight rate) dropped drastically because of the iron ore negotiation dispute between China and Brazil's based Vale which temporarily reduce seaborne trade (some have accused Vale of 'faking' an accident as an excuse to shut down its major port for several weeks in order to force the Chinese to agree to their price demand). When the Chinese agreed to 65% contract price hike, shipment resumed and the BDI recovered.

This time around, I think we may see the exact opposite...

Jun 08 08:52 PM

[ramisle:]

Good job Carlos,
Since the record level of imports of ore is way beyond the actual demand for steel then the current BDI is unsustainable. CISA has warned that 6 of the top ten buyers of ore this year have been traders, who are speculating that the iron ore price negotiations will be settled at a higher rate than the current spot rate.
If the settlement is 33% (contrary to reports, CISA denies the agreement) then the speculators will have been right, but it is questionable whether they will actually profit, due to the inflated rate to ship, and the cost to store ore at the ports. There is over 100 mmt. stored at ports and mills, and over 100 Capes sitting, waiting to unload. The FFA's pointed to a big drop in the BDI, and it started last week.
The present pace of imports is way above last year, when steel demand was high. The current pace of production of steel would amount to 540 million mt. for 2009. The government of China has said it is determined to hold production to 460 million mt. for 2009.
Somethings gotta give, it usually isn't the government. Worldwide demand for steel is way down, the recovery is expected to be slow.
No short squeeze for DRYS, there are 12-15 million shares short, and 257 million share outstanding.
Days to cover: about two hours, no big deal.

Jun 09 11:36 AM

[parkwood:]

Those traders can profit, because their shipping contracts were signed before the surge of BDI, and because of the slow import/export business, some ports now are willing to provide temporary free store, they just want to make money from busy unloading business.

I think Carlos is right. Normally there has some factors that will cause huge BDI changes during the negotiation, but after that, it will return to normality. The biggest factor I think will decide the trend of BDI is the actual demands of those china steelmakers. Last year the market was so hot, the ore and steel price was very high, no one cared too much about the shipping fee, they just wanted to find the vessels and ores for the production asap, this caused the BDI to jump over 11000, even under that circumstance, BDI collapsed quickly. Today the ore price is already 40% off, although China still managed the same production as last year, their steel market price and inventory deteriorated quickly, the profit of their large mills has dropped more than 90%, most of them are now struggling to make the ends meet, where do you think BDI and freight rate will go?

A few private owned mills said last week, they have enough inventory for a couple of months, because of the current high shipping fee, they won't import any ore this month. These small to medium size mills are the ones who have very aggressive import in the past months. They had huge lessons last year, last June the freight rate from Brazil to China has reached the high of more than $110/ton, but on Dec. it has dropped to $6.88.

Jun 10 01:37 AM

[Ellito:]

Time to get more shares of shipping co.
Pick the strong ones.
SBLK & OCNF both are making money now.
Get them while they are cheap.
Forget the index, it will rise eventually.
Oil has hit the $71.50 mark this morning.
Get some jr. oil co while they are cheap.
Who knows how high oil is going during this coming summer !!

Jun 10 05:30 AM

[OsideRes:]

"China's demand for iron ore, industrial components and other foreign goods has picked up as companies buy supplies for stimulus-financed projects. But global commodity prices are down from last year's highs, so imports have declined in financial terms even as they have increased in volume."

finance.yahoo.com/news...=

"Japan Steel Stocks Rise on Output Report
Japanese steelmaker shares rose after a newspaper reported mills are restarting idled capacity. "

www.bloomberg.com/apps...

Jun 11 01:47 AM

[ramisle:]

For every steel plant that is reopened, there are two that are shutting down.
steelguru.com

Jun 11 07:09 PM

[OsideRes:]

Buy DRYS before it's too late.

"... A gauge of six metals leapt 4.2 percent in London yesterday, the steepest climb since June 1, while crude oil for July delivery added 1.9 percent to $72.68 a barrel in New York, the highest settlement since Oct. 20. The Baltic Dry Index, a measure of shipping costs for commodities, gained for the first time in six days with a 0.9 percent advance..."

www.bloomberg.com/apps...

Jun 12 12:16 AM

[OsideRes:]

Actually, you should by DRYS just one or two days before June option expires. The option players keep DRYS low until June call options expire. Once the June call options expire, DRYS should quickly move up in price.

Jun 12 12:20 AM

[OsideRes:]

"... Indian Steel Demand May Rise 10%, Double Previous Estimate, Rastogi Says India’s steel demand may gain as much as 10 percent this fiscal year, almost double the pace previously estimated, as the government spends more on infrastructure, Steel Secretary Pramod Rastogi said. ..."

www.bloomberg.com/apps...

Jun 12 12:43 AM

[parkwood:]

OsideRes, Japan only imports one sixth amount of ores of China, this is the reason why China is very unhappy that they should followed the benchmark price negotiated by Japan and Austrilia. China is the key factor now, not anyone else. The current high rate of Capesize vessels is largely because of the clog in china ports, it needs 7-10 days for the clearance now. I don't think the rate of $70,000 and more is sustainable. China is overstocking ores now, this kind of import couldn't last long.

Jun 12 01:15 AM

[ramisle:]

Indian steel makers use Indian ore, no shipping. Indian ore is good quality, 63% FE.
China has poor quality ore which is why when the price is where it is now, it is cheaper to use imported ore. Half the Chinese ore mines have been closed.

Jun 12 08:54 AM

[Philip Obal:]

FREE diluted their shares with a huge 2nd offering just a short while ago. I am avoiding FREE..... The "dry bulks" appear to be a better play for know... as China & others are buying bulk materials like crazy!

Aug 25 02:20 PM