Baltic Dry Index Provides Little Insight Into Shippers' Returns

Mar.16.11 | About: Diana Shipping, (DSX)

Earlier today I posted a quote from Deutsche Bank about the effect of the Japanese earthquake/tsunami on the dry shipping industry, and you can check out my write-ups on Diana Shipping (NYSE:DSX) here and here, the company I believe to be the industry’s best investment opportunity.

The dry shipping industry has been hit hard by oversupply stemming from several strong years and declining demand due to the recession. This supply/demand imbalance has largely manifested itself in a weakening (and strangely volatile) Baltic Dry Index (BDI). Before we start focusing too much on the BDI, it is worth the time to read Howard Simons‘ short article about the impracticality of the BDI as either an economic indicator or even for judging the dry shipping industry (a counterintuitive proposition!).

In Simons’ words:

The BDI is, after all, an index of shipping tariffs, not of shipping profitability. Profits depend on costs, including those for labor, bunker fuel, insurance, and fees. Moreover, equity markets look ahead and know what orders are on the books for new ship capacity and what the trends in ocean shipping demand are.

03 10simons2 How to interpret the Baltic Dry Index properly (DSX, GNK, DRYS)

The range of correlation of returns over a short period tells you everything you need to know about the efficacy of the BDI as an indicator for ocean-shipping stocks.

Essentially, Simons’ point is that the BDI provides very little insight into the returns of different shippers, given the range of correlations.

Read the full article here.

Author Disclosure: Long DSX.