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BDI has roughly tripled

BDI has roughly tripled
The Baltic Dry Index's pop of 15% in one day, and a run of 17 consecutive positive days, racking up a gain of over 199% in a fortnight's trading.

The Baltic Dry Index's pop of 15% in one day, and a run of 17 consecutive positive days, racking up a gain of over 199% in a fortnight's trading.

The Baltic Dry Index (BDI) is a weighted composite index of the daily rate to ship dry goods (largely ores) on three different sizes of ships on four main shipping routes. The index provides an idea of what the spot price is for hiring a ship, and by extension is an indicator of shipping supply and demand. A high index level means the cost of hiring a boat is high (and shipping companies are making money - sometimes a lot of money). A low index level means that demand for ships is low and thus so are the costs of renting one.

Needless to say, the BDI is pretty interesting to those in the shipping industry - but it has a wider following than that, and last week, the news was full of headlines touting the Baltic Dry Index's pop of 15% in one day, and a run of 17 consecutive positive days, racking up a gain of over 199% in a fortnight's trading. The reason given for the steady uphill climb was iron-clad: increased shipments of iron ore led to increased demand for ships - and fewer ships available for hire.

Yes, the BDI has roughly tripled since bottoming out in December (rising from a value of 663 on December 5 to 1,895 on February 17) - but in the grand scheme of things, it was just a tiny blip on the radar.

Does it signal a recovery in the shipping industry and a recovery in the global commodity market? Most investors would like to believe that it does, but it is too soon to be sure. And, as with many indices, we may not know until we look back - it's always easier to call the bottom after the fact.

At its peak last year, the BDI reached a high of 11,793, and shipping rates for cape size were in the neighborhood of $230,000 per day (put in perspective, shipping analysts estimate the actual operating costs of a cape-size ship at around $6,500). As of Tuesday, the BDI stood at 1,895 and shipping rates for cape size vessels were $31,370. The year prior (2/17/08) the rate was $120,607. At the bottom of the trough, December 2, 2008, rates were $2,316 per day. The water cooler joke was that we were going to rent one and build a skateboard park in it.

Analysts have touted the BDI as the index to watch if you are interested in the global commodity market - the idea being nobody hires ships unless they have stuff to transport. And the logic sure held true as the commodity markets tanked this past summer and fall. As demand for commodities fell, so did the BDI because no one was buying or shipping much of anything - be it iron ore or grains. This is why all eyes are looking at dry bulk shipping at this time and the BDI's large jump last week garnered headlines across the world.

But, at its heart, the BDI is a shipping index, not an iron ore or grain index, and supply and demand of those ships is what makes it move. The supply side of the equation is scheduled to get bigger with more new builds coming on line as we move through 2009 and into 2010. According to the Weekly Report by Weber Seas, there are 168 cape-size vessels on the order book for delivery in 2009. That number jumps up to 343 in 2010. That means that is an additional 511 cape-size vessels are currently scheduled to be available for cargo within the next two years - assuming the financing is in place to pay for them all.

Rough times all around

While the rise in the BDI did prop up most of the shipping companies, albeit temporarily, these are rough times all around. There are a number of shipping companies, such as Excel Maritime and Star Bulk, that have suspended dividends for the quarter in order to save money. Others in the same situation include DryShips, Diana Shipping, Eagle Bulk Shipping and Genco Shipping and Trading. Bucking the trend, Euroseas Ltd. was able to pay dividends of $0.10 per share for the fourth quarter of 2008 - half of its previous declared dividend. Shareholders rejoice!

Part of the difficulty for ship owners back in December, was that demand for vessels was so low that many ships were anchored and idle - making no money at all. Now it seems there is a new problem. On Tuesday, Excel Maritime Carriers Ltd announced that at least two of their charterers have started paying only half of the contracted price. Charles Rupinski, an analyst at Maxim Group LLC told Bloomberg that this is the first report of a major company having charterers pay less than the contracted amount without the charterer company being in bankruptcy. The interesting thing to note is apparently two of the ships in question are contracted at around $40,000 per day - quite close to the current freight rate. The problem seems to be that those ships had been rechartered at a much higher freight rate and those customers reneged on the deal starting a domino affect.

It will be interesting to see how Excel handles the situation - since a charter is a legal document, there are legal actions it can take, though they are long and involved. Or, it may decide that something is better than nothing and accept partial payment. If that happens, we may see ripples throughout the industry with other charterers trying the same thing. Realistically, Excel will need to do something. Like most shipping companies, it is carrying quite a bit of debt to service and it can't go around handing out free lunches.

Note: Diana Shipping- one of the least affected shipping companies due to their reliance on long-term contracts - released its 4Q 08 results this morning. It narrowly beat most analysts' public expectations, pulling in $84.3 million in revenues vs. an expected $82.1, and nailed expectations on profits at $.72 per share. This is a big jump in revenue from last year's roughly $60 million quarter, and a direct reflection of the company locking in the high charter rates back in the boomtimes. Most of Diana's fleet doesn't roll off long-term contracts until after 2010, so if their clients manage to pay up, it looks like Diana has timed things perfectly.

Shipping stocks were quick to respond to the pop, with share prices rising with the, pardon the pun, tide. The chart below shows two bulk shippers - Diana Shipping (DSX) and Dryships (DRYS) in relation to the BDI.

Both companies' stocks popped on the BDI news, even though, as I discussed in Digging Into Shipping, they have different exposures to the spot rate market - Diana Shipping's fleet being completely under time charter and DryShips having more exposure to moves in the spot market, with less of its fleet committed to time charters.

The BDI's upward streak was broken last Thursday as demand from China's steelmakers for iron ore and coal weakened again.


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