As much of the dry bulk shipping industry’s service is commoditized, supply and demand balance is one of the most important drivers for dry bulk companies’ top and bottom line performances. The simplest and easiest metric available to investors is the Baltic Dry Index (BDI), which reflects the daily shipping rates to transport raw materials, such as iron ore, coal and grain across oceans in the spot market. When demand growth outpaces supply growth, shipping rates will rise, supporting companies’ revenues, earnings and profits.
Low baltic rates
On June 6th, the Baltic Supramax, Panamax and Capesize Indexes stood at 889, 764 and 1352. Shipping rates have fallen significantly over the past two years as a record number of new builds were delivered for service. While South American grain export has supported Supramax and Panamax shipping rates earlier this year, rates for Panamax class vessels have fallen as new builds continue to add capacity to supply, which pressures shipping rates.
Panamax rates are expected to be hit the hardest this year, with new deliveries amounting to 20% of existing capacity estimated by Pareto back in February. While this is most applicable to Panamax rates, other shipping classes will also be negatively affected as lower Panamax rates will attract customers away from using Supramax and Capesize vessels.
Negative implication ahead
This is negative for dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB), in the short to medium-term because time charters are correlated with spot rates. Safe Bulkers Inc. (SB) and DryShips Inc. (DRYS) are also at risk of seeing much lower revenues as their valuable time charter contracts mature (see contract value articles under Shipping Indexes for more information). The Guggenheim Shipping ETF (SEA) will also be affected as they invest in shipping companies worldwide.
On a positive note, new deliveries do not take into consideration the number of vessels that will be broken apart and taken out of service. Capacity growth, which takes into account the number of vessels scrapped, has flirted around 7.0% recently . Although this is still negative, as it is higher than demand growth reported by RS Platou for the first quarter of 2013, it portrays a brighter and more accurate picture.