Dry shipping stocks have been on a tear, led by the quickly rising rates as measured by the Baltic Dry Index. The largest vessel, called the Capesize, has risen the most in the last few weeks and has been most responsible for raising the entire index. Skeptics have been quick to point out that while Capesize rates rising to levels that make them quite profitable to operate, the smaller ships in the fleets haven't participated in the rate rally. That is, until last week. Capesize rates hit a peak of $42,211 on Wednesday then toppled nearly $4,000 in just two short days. This dive spooked investors that caused a two day plunge in some of the most popular names such as DryShips (DRYS) down 7.4%, Genco Shipping & Trading Limited (GNK) down 12.8%, Star Bulk Carriers (SBLK) down 4.6%, Eagle Bulk Shipping (EGLE) down 3.4%, and Diana Shipping (DSX) down 2.9%.
In the midst of this Capesize rate pullback panic, it appears investors overlooked the screaming rally the smaller ships experienced over the same week. Panamax rates rose 29.4% and Supramax rates rose 11.0%. Overall the Baltic Dry Index racked up another 7.5%.
But what is the Baltic Dry Index anyway? The BDI is simpler than most people realize. Each of the four common ship types is given equal weight to the index of 25% each: Capesize, Panamax, Supramax, and Handysize. The makeup of an individual company's fleet will in part determine how closely correlated the index is to its own fleet.
Since Panamax was the star rate climber last week, the two day negative reaction for DryShips seems unjustified, even though I criticized DryShips as not as pure play. Two-thirds of DryShips fleet is Panamax. The pullback in Capesize is more than made up for by the Panamax. Meanwhile Star Bulk Carriers only has 2 Capesize ships of its 28 so it should benefit handsomely from the shift away from Capesize and over to the smaller ships which is most of its fleet. Eagle Bulk Shipping is the most puzzling of them all since almost its entire fleet is Panamax ships, 43 out of 45 in its fleet along with two smaller ships. Fundamentally, Eagle Bulk Shipping investors couldn't have asked for a better week. Diana Shipping has a fleet that most closely matches the BDI of the group with exactly 25% of its fleet as Capesize just like the index. Yet it didn't fall as much as the others who have less or no Capesize exposure. Go figure.
Bottom line: Don't blindly follow the Baltic Dry Index, but study the individual fleet to get a handle on rates. It seems the market is moving the entire group mostly at once, unfairly punishing or rewarding individual names. That could be a perfect opportunity for traders and investors. Buy and sell the irrational rallies and dips accordingly. By studying the individual components of the company fleets and the rate changes among them, one can arm themselves to beat the irrational hysteria of the stock market for dry shippers.