Get In on Dry Bulk Shippers at Low Tide

Over the past three months, the Dow Jones Industrial Average and the S&P 500 have declined rather precipitously on the heels of the financial meltdown. Yet their decline seems quite benign when compared with the near 60% drop in the Baltic Dry Index over the same period.

The Baltic Dry Index is a shipping and trade index that essentially measures changes in the costs to transport raw materials -- metals, grains, fossil fuels -- by sea. It's essentially a proxy for daily shipping rates across three classes of cargo ships. To maritime shippers, this index is like the Holy Grail; its catastrophic drop has pummeled the equity prices of shipping companies. The BDI currently sits at approximately 4200, down from an all-time high of nearly 12,000 that it reached about five months ago. It's been nearly two years since the BDI was at the same level it is at today.

Not all shipping companies are created equally, and the fallout in the BDI means that equity prices deserve a closer look.

Across the Pacific

When it comes to shipping goods globally, the ocean is it. No other method is as economical when going from Los Angeles to China. In essence, the dry bulk shipping business is affected by two key variables: the charter day rates and the utilization rate of the ships, which is ultimately affected by the supply of available ships and the demand for goods in various parts of the world. To say the industry sailed right into a perfect storm today would be entirely accurate.

First, you have a strengthening dollar coupled with a decline in commodity prices. Then you have a general mood throughout he entire world that the global economy will continue to slow down, which is no good if your business is delivering essential economic inputs such as grains and metals. And of course there is China, the 800-pound gorilla, which seems to be losing its appetite for commodities. At the end of August, iron ore inventories sitting in Chinese ports increased to 70 million tons, the highest level this year.

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