Why the Baltic Dry Index dipped in November

Baltic Dry Index

The Baltic Dry Index measures the price of transporting dry bulk by sea. The Baltic Exchange Dry Bulk Index (BDIY) is a composite of rates for different ship sizes factoring in the average daily earnings of Capesize, Panamax, Supramax, and Handysize dry bulk transport vessels.

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November performance

Since November 1, the Baltic Dry Index has recorded a significant decrease of 44.8% in trading to 803 from 1,456 at the beginning of November. On a year-over-year basis, the index has declined by 62.4% from its near 52-week high levels of 2,134 on Dec 19, 2013.

Despite a decline in fuel prices, the Baltic Dry Index has recorded an approximate 40% drop since the start of November and a 62% decline year-to-date. Freight rates for Capesize ships, one of the larger ships that specialize in long haul and large volume iron ore and coal transports, have dropped nearly 50% in the past three months.

Dry bulk industry is uncertain

The CEO of Goldenport Holdings, John Dragnis, reported that the 2015 outlook for the dry bulk industry is uncertain. The long-awaited recovery in the sector may not materialize in the near term as the orderbook casts a shadow over subdued demand. This is reflected in the capesize and supramax freight forward agreements for calendar year 2015, which are currently trading at $12,200 and $8,825 per day, respectively.

Dragnis added, “We remain nevertheless optimistic about the dry bulk sector and believe that increased coal imports to India, long-haul Brazilian iron ore imports to China and South American grain exports could lead to a sustainable rally.”

With a positive outlook expected in 2015, companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA) are likely to benefit. Shipping rates play a key role in the companies’ revenue and cash flows.

Going forward, let’s take a look at what other factors affect shipping rates.

China PMI continues downtrend amid lowering interest rates

China PMI influence on dry bulk companies

The National Bureau of Statistics revealed China’s official purchasing managers’ index (or PMI) further slumped to its eight-month low of 50.3 in November, indicating only modest expansion in economic activity. However, the index is lower than the market forecast of 50.6 and October levels of 50.8. The official PMI survey indicated that demand for Chinese goods was stronger domestically than abroad. New export orders dipped.

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With PMI data on a downturn, dry bulk shipping companies like Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), and the Guggenheim Shipping ETF (SEA) will be negatively affected.

Interest rates lowering impact

Despite the Chinese government cutting interest rates in November, the economy’s manufacturing sector slowed down, adding pressure on the authorities to scale up stimulus measures. The People’s Bank of China (or PBOC) surprised financial markets on November 21 by lowering interest rates to push growth.

The PBOC’s rate cut couldn’t support the market sentiment significantly, and thus there was very little improvement in activity indicators in November, ANZ research revealed. ANZ research further added that “In order to maintain growth for the whole year at around the official target of 7.5%, Chinese authorities will intensify easing efforts in December to accelerate growth momentum.”

Looking ahead

Qu Hongbin, the chief economist at HSBC, said, “Disinflationary pressures remain strong while the labor market weakened further,” while also noting that the rate cut last month should help bolster property and manufacturing investment.

Going forward, industry analysts believe there will be more interest rate cuts in the upcoming months.

Port Hedland iron ore exports plunge to 7-month low

Port Hedland

The world’s iron ore seaborne exports are significantly comprised of exports from Australia and used by major industry companies like BHP Billiton (BHP), Fortescue Metals Group (FMG), and Atlas Iron. Shipments through Port Hedland represented 55% of Australia’s iron ore exports last year, and more than 80% of the cargo goes to China.

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November shipments plunge

According to the port authority data, shipments from the world’s biggest bulk export terminal, Port Hedland, stood at 29 million metric tons in November compared to 31.7 million tons in October and 22.3 million tons in November 2013. Shipments dipped to the lowest level since April 2014 as China, the world’s biggest buyer, ordered some mills to curb output to cut pollution before a global summit in November.

Some mills were ordered to suspend or reduce output before the summit at the Asia-Pacific Economic Cooperation forum in Beijing as the authorities sought to improve local air quality.

Gerard Burg, senior Asia economist at National Australia Bank, commented, “It’s related to the shutdowns that we saw in Hebei province related to the APEC conference. That’s certainly weakened spot demand for iron ore over that period.”

With exports dropping to their monthly lows from Port Hedland, dry bulk shippers such as Star Bulk Carriers (SBLK), Safe Bulkers Inc. (SB), Baltic Trading Inc. (BALT), and Knightsbridge Tankers Ltd. (VLCCF), as well as the Guggenheim Shipping ETF (SEA) may see a negative impact.

Brazil iron ore export dips in November

Brazil iron ore imports

Brazil is the second largest iron ore exporting country accounting for almost 25% of market share. The country is home to Vale, one of the largest mining companies. Therefore, shipments out of Brazil are a key metric to watch as higher export volumes have a positive effect on shipping rates, which are a critical variable that moves dry bulk shipping companies’ revenues, earnings, cash flows, and share prices.

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November export dips

According to the Brazilian Ministry of Development, Industry and Foreign Trade, Brazil’s iron ore export volume amounted to 25.96 million tonnes in November 2014, decreasing by 18.3% compared to October 2014 and down 16% compared to November 2013.

Vale comments

After the Port Hedland statistics of lower iron ore exports were revealed, Vale, the world’s biggest iron ore producer, warned that the company’s production of iron ore up to 220 million tonnes will be unviable if the prevailing prices continue in 2015.

Vale is in the middle of building new operations in the Carajas region of Brazil, which will grow its iron ore exports by 90 million tonnes a year. The company expects to be producing 411 million tonnes by 2017 and 459 million tonnes by 2019.

Due to Vale’s comments, larger shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and the Guggenheim Shipping ETF (SEA) may trade in the positive.

Crude steel production drops on steel furnace closures

China’s crude steel production

One of the major indicators that dry bulk shipping investors should watch is China’s crude steel production. Iron ore is the main ingredient necessary to manufacture steel, and China is the largest producer and consumer of the two commodities.

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Dry bulk shipping companies like Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), and the Guggenheim Shipping ETF (SEA) may see a negative year-over-year growth and a substantial slowdown in steel production.

Crude steel output

China’s thermal power industry is capping energy use

China power industry

The Chinese industrial sector consumes almost 70% of overall electricity consumption in the country and high energy intense sectors like steel, chemical, cement, and paper are responsible for 50% of the total industrial electricity consumption.

China’s policy makers are trying to limit the nation’s appetite for energy. As a result of rapid industrialization and economic growth, China has become a voracious consumer of energy, changing global energy markets and the geopolitics of energy security.

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Measures to cap energy use

For the seven-year period to 2020, China plans to cap its energy consumption rate at 28%. The nation is targeting energy use equivalent to an annual 4.8 billion metric tonnes of standard coal by 2020, according to a statement from the State Council. This is a one-sixth increase on current consumption, already by far the world’s largest. China’s energy use surged 45% in the seven years to 2013, according to data from the National Bureau of Statistics.

Coal accounted for 66% of China’s energy consumption last year, according to the National Bureau of Statistics. The US gets about 30% of its electricity from coal, according to Bloomberg New Energy Finance data.

China also plans to install as much as 58 gigawatts of nuclear power by 2020, with an additional 30 gigawatts or more under construction by then. China has about 15 gigawatts of nuclear power at the moment. These steps would have an impact on dry bulk shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Knightsbridge Tanker Ltd. (VLCCF), and the Guggenheim Shipping ETF (SEA).

Power consumption

For the month of November, power consumption in China grew 3.3% year-over-year to 463 billion kilowatt hours, according to the data from the National Energy Administration. For the first 11 months of 2014, total power consumption was more than 5 trillion kilowatt hours, an increase of 3.7% year-over-year.

During the first 11 months, newly installed power generation capacity hit 67 million kilowatts, accounting for 34 million kilowatt hours. Newly installed hydro-power capacity was 18.2 million kw during the period.

Power output on the fall

The overall power output is important, because it reflects how industrial activity is progressing. According to data from the National Bureau of Statistics, China’s power generation, or output, increased 0.6% in November to 448.7 billion kilowatt hours from the corresponding period a year ago. On a month-over-month basis, power output was up 0.92% led by higher heating demand.

Data from the National Bureau of Statistics showed power output from thermal plants fell 4.2% from a year earlier to 345.5 billion kilowatt hours, while hydroelectric power jumped nearly 35%.

Total power generation in the first 11 months of 2014 rose 3.9% from a year ago to 4.97 trillion kilowatt hours.

Why China’s iron ore and coal imports declined

Importance of iron ore and coal imports

China is the world’s top iron ore and coal consumer. China imports almost 60% of the world’s seaborne iron ore while its coal trade accounts for almost a quarter of the global trade. In 2013, China imported 820 million tonnes of iron ore and 330 million tonnes of coal. Both iron ore and coal account for nearly 30% each of the world’s dry bulk trade volume.

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The Guggenheim Shipping ETF (SEA) or dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) that haul key dry bulk materials such as iron ore, coal, and grain across the ocean have a direct correlation with the commodity imports data.

Iron ore imports

The General Administration of Customs reported that China’s iron ore imports fell 13.4% in November from a year earlier, to 67.4 million metric tonnes. Imports were down 15.1% month-over-month in October. In the 11 months ended November 30, China imported 845.77 million tonnes of iron ore, up 13.4% from a year earlier.

Coal imports

Data from the General Administration of Customs indicated that compared with a month earlier, coal imports climbed 4.5% to 21.03 million tonnes. Chinese coal miners, led by top producer Shenhua Group, have been raising domestic spot prices since September.

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China’s November coal imports dropped 26% from a year earlier as users were forced to cut shipments after Beijing reinstated import tariffs in October, but imports unexpectedly rose due to higher domestic spot prices.

Why the dry bulk orderbook is decreasing

The importance of ship orders

Orderbook is an indicator that investors can track for the long run, as dry bulk ships generally take one or two years to construct. Managers clearly indicate their expectation of future supply and demand differences through the number of ships they order.

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Rising and falling ship orders indicate the different market scenarios. When managers don’t purchase new ships, it indicates that future supply will increase more than demand. When managers expect demand to outpace supply growth, companies return to the shipyard to place new orders, as they expect to generate profits with the new vessels. Thus rising ship orders often indicate that shipping rates will rise.

November orderbook

The dry bulk orderbook in November reduced to 173.7 million DWT (or deadweight tonnage) from 177 million DWT recorded in October 2014. In terms of number, the total orderbook decreased to 2,818 from 2,861 with all vessels recording a dip except Panamax vessels. A drawdown in orderbook indicates that investors and managers are skeptical about the industry growth rate.

Dry bulk companies

Amid a dip in dry bulk orderbook, dry bulk shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM) may experience negative trading as investors seek to play it safe in such conditions. The Guggenheim Shipping ETF (SEA) is also following suit.

Must-know: Newbuild dry bulk prices dip

Newbuild vessel prices

An indicator to gauge the fundamental prospects of bulk vessels, ship prices fall into two categories: newbuild vessel prices and secondhand vessel prices. While newbuilds are a clear representation of future rates due to the higher construction period, secondhand vessels help to analyze shorter term fundamentals.

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Stagnant newbuild prices

For bulk carriers, Capesize vessel prices stood at $54.2 million in November as compared to $54.8 million in October. In January 2013, Kamsarmax and Ultramax vessel prices recorded $29.1 million and $27.4 million, respectively, compared to $29.3 million and $27.6 million in the previous month.

Total dry bulk fleet grew to 654 million DWT (or deadweight tonnage) from 604 million DWT, with capsize vessels recording 12.8% growth and Panamax vessels recording 8.9%. Handymax/Supramax vessels grew 8.2%.

November newbuilding activity

Greek broker Intermodal said, “Despite the fact that newbuilding prices currently offer significant discounts compared to the year average, ordering interest remains extremely soft, with those owners who are ready to invest, showing a clear preference to secondhand tonnage over newbuildings.”

The broker further added that in the first quarter of 2015, activity will follow the same sluggish pace, as analysts don’t expect any of the yards’ marketing efforts to have any significant impact on ordering interest at this stage.

A slowdown in newbuilding activity may have an impact on the Guggenheim Shipping ETF (SEA) and the performance of dry bulk shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).

5-year and 10-year ship prices for dry bulk companies

Newbuilds versus secondhand vessel values

Secondhand vessels are characterized by faster deliveries and thus reflect medium-term to short-term fundamentals. These prices tend to be more responsive to changes in current rates as they’re more responsive to industry turnarounds compared to newbuilds. Although this only takes about one or two months, share prices can move fast within a small period.

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On the contrary, buyers and sellers of newbuilds have to wait for almost two years for delivery and thus indicate longer-term fundamentals.

November secondhand vessel values

Vessel values for 5-year and 10-year-old Capesize in November dropped marginally to $41.2 million and $31.4 million, respectively, from $41.7 and $32 million in October 2014. Panamax vessel value for 5-year and 10-year declined to $20.6 million and $14.9 million, respectively, from $22 million and $15.1 million in the previous month.

Supramax 5-year-old prices dipped to $21.8 million from $22.4 million, while Handymax 10-year-old vessels dropped to $14.7 million from $15 million in the previous month.

Vessel prices bottoming

Vessel prices are very close to bottom levels that occurred back in the period from December 2012 to January 2013, while the freight market has been fairing at better levels compared to that period. Lower vessel prices in the secondhand market indicate negative performance for dry bulk shipping stocks like Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM).

A strong outlook will have a positive impact on these stocks, as well as on the Guggenheim Shipping ETF (SEA).