25-07-2016

Sentiment Improves Around Baltic Dry Index, Shipping Companies

BI

Shipping companies have been struggling since the Great Recession zapped demand to transport raw materials around the world. While the economy has staged a solid rebound since the recession, shipping companies and the Baltic Dry Index have struggled as an oversupply of ships has pinned down hire rates.

While the global economy recovered, the Baltic Dry Index continued to languish and hit a record low of 290 points this past February, well below its record high of 11,793 that it reached in May 2008. The BDI has recovered since hitting that all-time low, and is now trading in the upper 700 points.

There were doubts around the recovery in the spring, but now market participants are starting to have some faith in the rebound. While the BDI has regrouped, the share values of shipping companies are finally, albeit slowly, improving. Still, the industry as a whole remains challenged with high levels of debt and a lot of competition due to the plentiful amount of ships in the market.

What put the BDI in this spot is the fact that shipping companies, expecting the last economic growth cycle to persist, and even accelerate, put in orders to build new ships before economic disaster struck. Due to the length of time it takes a ship to be built, these new ships came online after the economy had collapsed. Now, even though the economy is better than it was, there are more than enough ships available and this is pulling down shipping rates.

There is some reason to be optimistic about the BDI, and shipping companies do warrant a bit of a recovery, but this will be an anemic recovery that will vulnerable to corrections. The BDI should see support from increased demand to transport raw materials and a slight acceleration in ship scraping. But, the major caveat here is China.

The BDI has seen support over the summer from solid shipping demand from China. Now if the worst fears end up being true, if the country is in the midst of a stockpiling program and it will soon curb imports of various raw materials, then the shipping sector could be headed towards major trouble.

Source: Economic Calendar

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