The Baltic Drybulk Index has surged 40% in the last 30 days. The index (663 points) was near its 52- week high of 647 points, when a rise in demand for Capes led to a rise in the BDI. The recent increase in marine transportation of coal is also sending bullish signals to the market. What needs to be decided is if the rise in rates is an indication of a complete revival in demand or just a temporary rise because of the approval of infrastructure projects in China, the largest consumer of iron ore in the world.
As mentioned in our earlier articles, BDI is formed of weighted averages of charter rates of Capesizes; Handymax, Supramax and Panamaxes. Each vessel size has its own index (BCI, BHSI, BSI and BPI). These averages then make up the BDI. The following shows the daily trip charter rates for different vessels:
Following shows the change in the indices on 15th October.
The iron ore spot prices have increased by 30% since early September. The stock piles are down and the firms are importing more in order to replenish the stocks. According to a news agency in Xinhua, steel prices in China are likely to rebound as the State has approved $156 billion worth of infrastructure spending. 29 capesize vessels in the third week of September were used to haul iron ore to China, the largest weekly volume since March.
The index for Panamax has also risen. Panamax are used to transport coal. The demand has strengthened after the coal inventories at the Chinese power stations declined. A Panamax normally carries 60,000 tons of coal. Demand gained after the stock of coal at port of Qinhuangdao reached 5.5 million tons, 1.5 million tons short of the government target of 7 million tons. Again, the same question needs to be answered, how much of the demand is temporary? In an earlier article, we mentioned that China imports excess coal in the third and fourth quarters as freezing temperatures disrupt the activity at ports for the next three months. Having said that, it is also important to remember that China is planning to increase its electricity generation in the country, therefore, the hike in demand may not be temporary after all.
The table above shows the number of Capesize and Panamax that each company has in its fleet. Where DryShips (NASDAQ:DRYS) and Diana Shipping (NYSE:DSX) have the larger number of Panamaxes and Capesizes, Genco Shipping (GNK) and Paragon Shipping (NASDAQ:PRGN) also have exposure to coal.
All these stocks are expected to benefit from the rise in coal and steel activity. The bulkers that trade purely on BDI will be the major beneficiary from the surge in BDI. Baltic Trading (NYSE:BALT) and FreeSeas (NASDAQ:FREE) are the bulkers that are a pure play on BDI. Also, most of DRYS' Panamax fleet is on spot charters. However, in the long-run, all bulkers will benefit in case the rise in BDI is sustained.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Industrial Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.