Soaring Dry Freight Index Benefits Excel Maritime

The pessimism about the dry bulk shipping industry is amazing. Another day, another doubter. Friday, Motley Fool wrote:

If rates begin to return to historical levels, investors would do well to keep in mind that, from 1994-2002, the Capesize rates were rarely above $10,000. It looks like an awfully bubbly market if you ask me, even for skilled operators like Excel Maritime Carriers (NYSE: EXM) and tankers General Maritime Carriers (GMR) and Tsakos Energy Navigation (NYSE: TNP).

The Motley Fool argues that Baltic Dry Freight Index [BDI] prices will likely revert to their historical mean. But why? There is a place for mean reversion arguments; I have seen mean reversion analysis used in thoughtful ways by top-notch commentators like Jeremy Grantham and John Mauldin. Too often, though, it is used as a crutch--an excuse to avoid meaningful analysis.

Take the BDI mean reversion argument. Yes, freight rates across all sizes (including the Capesize cited by Motley Fool) are high by historical standards. Not as high as last year, but much higher than 1994-2002. But is there a reason for this? Bulk dry freight carriers haul a host of commodities, with prices generally set at the margins by demand for shipping coal and metal ores. Copper, steel, iron, and coal demand and pricing are all significantly higher than 1994-2002 levels. So why should the shipping rates for these products or their ores be unaffected? The cost of the diesel fuel used to power these vessels has also risen dramatically. Other shippers have managed to pass a good part of these costs on to the customer; why should we expect that not to occur in the bulk dry shipping industry? Finally, the U.S. dollar has weakened significantly against a basket of global currencies; why should we expect that these currency fluctuations will not be reflected in dollar-denominated shipping rates?

I take no position as to where the BDI "should" be. It is at a 52-week high. That is all that matters. As long as this trend continues, shippers like Excel Maritime (EXM) should do just fine.

DISCLOSURE: I am long EXM. I have no position in GMR or TNP. Not a recommendation to buy or sell any security. For informational and educational purposes only.