Amongst the most sought information on this site is that concerning the Baltic Dry Index (BDI). And, indeed, at a time when equity markets offer little reassurance a rocketing BDI – now over 10,000 – looks a promising place to find comfort.

The last time the BDI was covered here it was just over 7,000. That was in August. The thesis then was that a counter intuitive opportunity existed in the scramble to finance and build new ships. That still holds and one notable development for those interested in riding the idea has been the Suez-EDF merger which will see the former spin-off its environmental waste and recovery activities.

Still, more interest lies closer to current happenings. Volumes of traditional ship financing remain immense (despite some signs of pullback amongst, most visibly, German banks) and are allied with increasing private equity activity. Shipping IPOs in the current quarter are well into double figures and this drive to increase fleet sizes shows up in record ship prices: some existing 7 year old ships (capesize class, for example) are commanding the same prices as similar new build tonnage.

There comes a point where ship buyers have to judge whether freight rates, and the outlook for freight rates, can justify these prices. Sustained by the China and India demand stories they evidently judge that they still can; and in this they are succoured by the q4 seasonal surge in transport prices, typically driven by heating oil demand.

However, a mitigating factor of the profit hopes of ship buyers is the cost of bunkering – in broad terms ship fuel. Shipping consultants McQuilling Services provide a useful insight into how sharply these bite into what appear to be reassuringly strong freight rates. And one shipping CEO this month appears to provide industry confirmation of this. If, as he suggests they must, these bunker costs are successfully passed on down the line they are likely to infiltrate even the core inflation measures of the US.

Yet perhaps the most significant challenge to the China/India decoupling hypotheses comes from the generalised flight to government paper. 10 year US constant maturity rates typically relate positively to the BDI with a lag of 3 to 6 months. There is currently a sharp divergence from this trend which, time will tell, either supports the prevailing shipping enthusiasm for decoupling or may come to be seen as the proverbial warning shot to the head.

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2 comments

  1. Charles Butler // 12/05/2007 06:44:00 PM

    Of course, there's also the Peloponesean DryShips Index (PDI) that keeps track of how many press releases can emanate from the offices of DRYS in a one week period, without them having to resort to reporting successful refuellings. At first glance, its value seems to be strongly correlated to the difference between 131.34 and its current stock price....

  2. Barry // 1/30/2008 10:33:00 PM

    On DRYS, EGLE, GNK, DSX and others, they pass on the fuel costs because all the charters are done under T/C basis.

    Forward market is actually pricing 1Q 2008 overall, and 2Q 2008 at a "contango" (did I use that right- ie upward slope) compared to spot.

    I would be watching the forward rates rather than the BDI only.

    bdp1 Consulting Ltd

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