Dry Bulk Shipping Drive Inflation
As soaring shipping rates drive the prices of dry bulk commodities higher, investors wonder what the breaking point will be.
In some cases the shipping prices for iron ore from Brazil to China have gone as high as 100 times the price of the iron ore itself, says Lazard Capital Markets analyst Urs Dur.
With a good portion of the iron ore delivered to China delivered on the spot market, rates on Capesize ships, which are the largest vessels, have skyrocketed. Currently, the freight cost for a ton of Brazilian ore to China is about $108 per ton, higher than the $80 per ton price for iron ore from Brazilian miner Vale, the world's top ore producer.
The delivered price of iron ore with the freight has risen by 75% to 80% in the last year. But it"s not only freight rates on iron ore that are rising, it"s coal, grains, fertilizers and cement as well.
As the delivered costs of raw materials rises, the importers of those raw materials?especially China and India?are negatively impacted by the inflation. Eventually higher prices are passed on to the end users of those products, the consumer.
At the same time China exports a significant amount of finished products to the U.S., which means the U.S. consumer will ultimately pay higher prices on consumer goods imported from China, as well.
On the other hand, even though oil prices are surging, the freight rates are only a small portion of the delivered costs of oil, says Dur. ?We"re talking about pennies on the dollar to the cost of delivered gasoline to your car,? he said.
Meanwhile, the Baltic Dry Index, which measures dry bulk shipping rates on 40 routes across the world, hit record highs this week, peaking on Tuesday at 11,783, before falling back to 11,465 on Friday. The index is managed by the Baltic Exchange in London.
Dur said that trading volumes were down on Friday because of the holiday weekend, with the London and New York Stock Exchanges closed on Monday. ?The Baltic Dry Index is ridiculously high and investors are running for the hills going into a long weekend globally,? Dur said.
On Friday crude oil prices for July delivery were $131.79, up from $130.60 on Thursday, spooking investors and sending dry bulk shipping stocks tumbling.
DryShips shares fell 2.3%, or $2.11, to $90.02 at the close on Friday, while Excel Maritime Carriers sank 5.2%, or $2.64, to $47.86. Navios Maritime Holding declined 1.5%, or 19 cents, to $12.89.
But the underlying fundamentals for the dry bulk shippers are very solid. ?In a volatile market the word fundamentals is a dirty word,? Dur said. ?People are trading on news, not on the fundamentals of the stock, which creates tremendous volatility.?