Commodities Breaking Out: Will Baltic Dry Index Follow?

Asset reflation has clearly become the play in the markets as the concerted global printing press continues to churn out its magic dust and continues to bridge the gap between still-fragile business/investor sentiment and eventual economic recovery.

Commodities have performed as well as stocks, as exhibited by the powerful breakout in the Reuters/Jeffries CRB index as of late. The index has about a 30% exposure to energy, while it is also exposed to a number of hard and soft commodities contracts.

As improved commodities prices incite producers to redeploy idle capacity, and as some businesses have overshot on the downside with regards to bringing down inventory levels, will a revival in shipments of commodities, particularly raw material components in dry bulk containers, be not too far behind? Clearly, China's restocking of iron ore and steel imports has helped.

Looking at the chart of the Baltic Dry Index (BDI), we are clearly nearing a decision point with the index approaching major resistance levels, in particular the 130-day moving average. The improving MACD shows that we have clearly put in a bottom to the index for the short-term. I use a move above and below the 130-day moving average to signal major reversals of trends.

While dry bulk shipping has a lot of headwinds (including the much publicized overcapacity as ship deliveries are due the next few years), the dry bulk segment has done better than the oil tanker and container segments due to emerging market demand. Well managed dry bulk shipping companies (in terms of balance sheet and access to funding) can be high leverage plays on any global economic recovery.

Looking at individual dry bulk shipper names, I am currently interested in Navios Maritime Holdings (NM). It has favorable access to bank credit, a good mix of owned and chartered-in ships, as well as options to purchase 11 ships at below current market value. It has also over 80% of revenue days contracted for next year that could provide stable revenues, while still being flexible enough to leverage a recovery in global trade by buying new ships. I'd look to buy NM for the model portfolio at above $5.13.

Disclosure: None

Comments

[coprophagous:]

When will you guys wake up to the fact that the Baltic Dry Index is only a reflection of a very few short term ( spot) fixtures for certain dry cargoes and in no way is an accurate index of the vast majority of shipping rates. The market for drybulk carriers is hugely overtonnaged and getting worse as more than 3,000 new ships will deliver over the next 12 months, most of which have no prearranged employment.
Commodity prices have little bearing on shipping movements but fuel the minds of the day traders who play in a large number of dry shipping stocks.

Oct 19 06:28 PM

[Alan Young:]

Good article.

Coprophagous -- Your name is very apt. You are so eager to find excreta that you ignore the fact the the author has already accounted for these factors in his discussion.

On Oct 19 06:28 PM coprophagous wrote:

> When will you guys wake up to the fact that the Baltic Dry Index
> is only a reflection of a very few short term ( spot) fixtures for
> certain dry cargoes and in no way is an accurate index of the vast
> majority of shipping rates. The market for drybulk carriers is hugely
> overtonnaged and getting worse as more than 3,000 new ships will
> deliver over the next 12 months, most of which have no prearranged
> employment.
> Commodity prices have little bearing on shipping movements but fuel
> the minds of the day traders who play in a large number of dry shipping
> stocks.

Oct 20 01:09 AM

[coprophagous:]

Alan Young. Nowhere does the author reflect the effect of the vast newbuilding program or the fact that the BDI is not representative of the majority of the dry cargo market. Shipping companies with expensive bulk carriers that trade in the spot markets will see ever decreasing revenues as the cargo owners gain more control of their shipping with longterm charters and large fleets of their own ships.
Factor that into the graphs.

Oct 20 12:36 PM

[parkwood:]

It is interesting to see optimist show up when BDI is picking up, and vice versa. I respect the technical analysis, but don't believe in your graph too much, there has much complicated stories behind it.

Basically I agree with coprophagous, but I think if the author narrowed the commodity variety to iron ore, it will make more sense. It is widely expected next year the contract price will tick up 10-20%, and the miners now are asking 30-35%. This may not be the breaking out as somebody wishes, it will bring some volatility to BDI. Certainly the overcapacity will be a big headache like the tanker owners now are facing.

Oct 20 10:46 PM