The Gurus and the Little-Known Shipping Metric

Time magazine recently had a piece on “the least known key economic indicator” — the Baltic Dry Index.

The BDI, which is a measure of worldwide shipping rates, has “registered some eye-popping gains over the past month,” Time’s Jeff Israely writes. “The London-based index registered its 23rd straight daily gain on Wednesday, closing at 4,291, its highest mark since September and the longest streak of gains since July 2006.” Daily rates for large “Capesize” ships that typically carry iron ore were at $93,197 last week, Israely notes; five months ago, they were a small fraction of that, sitting just above $2,000.

The intimation is that the global economy is getting back on the right track. “We can say that the complete lockup of world trade we saw at the end of last year has eased considerably,” Baltic Index President Jeremy Penn told Time.

Still, you should always be careful of any sort of “silver bullet” metric, and Penn himself notes that the Baltic Index has its limitations. “Indeed,” writes Israely, “the current boost is best explained by Chinese steel production demand and a shortage of the Capesize vessels to haul the iron ore. Penn notes that it is not yet clear whether the core manufacturing that is turning again in China is linked to coming export demand or domestic infrastructure investment.”

Whether or not the Baltic Dry Index ends up being a sign of a global recovery or something else remains to be seen. But what’s not up for debate is that shipping prices have, in general, jumped by a pretty huge amount in recent months. That got me wondering which firms might benefit from a run-up in shipping fees, and might stand to benefit if the economy does indeed continue to show signs of life.

I found a handful of shipping firms that fare well on my Guru Strategy computer models on Validea.com:

• Kirby Corporation (KEX): Strong Interest (93%), Peter Lynch-based model
• Diana Shipping (DSX): Strong Interest (93%), Peter Lynch-based model
• Overseas Shipping (OSG): Strong Interest (93%), Peter Lynch-based model; Some Interest (90%), Joseph Piotroski-based model
• TBS International (TBSI): Strong Interest (93%), Peter Lynch-based model
• International Shipholding (ISH): Strong Interest (93%), Peter Lynch-based model; Some Interest (83%), Motley Fool-based model
• SEACOR Holdings (CKH): Some Interest (86%), Benjamin Graham-based model; Some Interest (74%), Peter Lynch-based model

You should be aware that shipping prices, and thus shipping company earnings, can be volatile, and several of the firms that draw interest from my models have had erratic earnings over the past five years. Among the more stable earners: Kirby Corporation (KEX), which gets approval from my Peter Lynch-based model, and SEACOR Holdings (CKH), which gets some interest from my Lynch- and Benjamin Graham-based models.

Comments

[bdp1Consult...:]

DSX has ties to the Baltic Dry Index, but its ships are mainly hedged out on timecharters now so the relationship is not day to day. TBSI may have ever so slight relationship if its multipurpose ships find their way into the spot market. But the others are not impacted by the Baltic Dry Index.

There are also a group of tanker indices published by the Baltic Exchange which you might investigate.

Barry Parker

Jun 15 10:48 AM

[poor&unempl...:]

Are others like SECOR and OSG even remotely correlate to BDI? Like I have stated many times on this board, taking BDI seriously is like asking NAR on the housing sales.

Can someone explain the related party charters affecting BDI?

eg. A large charterer has a panamax on longterm charter at $50k/day. When that vessel is chartered to his related company at spot market rate of $30K / day - is that a real rate while number of other vessels are willing to do the business at $10K or less.


On Jun 15 10:48 AM bdp1ConsultingLtd wrote:

> DSX has ties to the Baltic Dry Index, but its ships are mainly hedged
> out on timecharters now so the relationship is not day to day. TBSI
> may have ever so slight relationship if its multipurpose ships find
> their way into the spot market. But the others are not impacted by
> the Baltic Dry Index.
>
> There are also a group of tanker indices published by the Baltic
> Exchange which you might investigate.
>
> Barry Parker

Jun 15 03:08 PM

[bdp1Consult...:]

Charters are done at whatever rates the market is at, when concluded. The spot rates swing wildly- were $5K per day (for big vessels) earlier this year- now building at base at $50K per day. There is also a term structure to rates- long term charter rates, say 1 or 2 years charter length, tends to be lower than spot (30 - 45 days voyage length typically) when the market gets overheated. So all that could explain the variances that you've seen. The related company thing is a whole Greek drama in many acts- too long for posting here and not directly relevant to discussion of the BDI.

My point was that the BDI is not a good indicator for most of the companies mentioned because they are not in the drybulk business. Even DSX, which is in that business, has ships mainly (all?) on term charters so they are not impacted by the daily ups and downs of the BDI. Companies often do "layering", ie charter at different times, sort of like retail stock buyers are urged to dollar cost average, keeps you from making bad decisions for ALL of your assets. Result would charters for similar boats at widely divergent rates.

But the BDI is a great indicator for shipping activiity in a few industrial sectors. It may correlate with macro indicators, but it's a correlation only- no causality of any type. So, it's runup says to me, yes the world economy is still breathing, it has a pulse, which economists have been starting to come around on since March. But dry shipping is vastly oversupplied right now, and it would take a sustained recovery in demand, and some pleasant surprises on the supply side (possible, but by no means not a sure thing) to lead to a real recovery in drybulk rates.

And, there are some tanker indices which may be better indicators for some of the stocks mentioned. OSG for example does have some spot tanker exposure so maybe Baltic Dirty Tanker Index (BDTI) might yield some good results. Seacor has nothing to do with either index, nor does Kirby but both obviously do better when energy activity is up, so there may be a correlation with the BTDI. I have not run the numbers but maybe someone has.

Jun 16 10:30 AM

[HerrHansa:]

Spot rates can affect charter rates, when the differences are too wide. Companies can and do break charter agreements, though rarely. It might be a nice assumption to think that companies with mostly chartered fleets are insulated against swings on spot rates, though the reality is that spot rate changes put pressure upon future chartering contracts.

There are more indexes to watch than BDI, though that seems to be the darling of the major media for the moment. Bunkerworld.com runs an index, as does Tankerworld.com, while shipbrokers Riverlake Group run a European Tanker Index. At the moment, the only solid upward moves are in tankers and wet cargoes, though even with that the segment is around 50% down from last year's high points.

Manufacturing is still slowing, and other than a short term movement increase of raw materials to China, there has been little to lift shipping rates. Until manufacturing restarts, or inventories dwindle more, there is little to indicate more than a slow movement in spot rates on dry cargoes. Perhaps that indicates a bottom, though my feeling is that rates could stay low the next quarter or two.

Jun 16 02:33 PM

[skipper54:]

The BDI does not reflect the earning capacity of the companies mentioned in this posting - it gives a very rosy picture of the freight market but in fact only owners in the Panamax and Capesize are being benefited - and that is solely due to the pressure on space for iron ore into China. I would suggest that the movement of steel across the oceans is a much better guide to the healthiness of the quoted companies - and the situation with steel is pretty dire and still not looking any better. Unless of course the Chinese start moving huge volumes (they must be doing something with all that iron ore, after all)........I am bearish on drybulk at least until October.

Jun 17 01:16 PM

[Anthony Alfidi:]

KEX is focused on inland marine shipping in North America, so the BDI isn't relevant to their business model.

Sep 25 11:58 AM