Bigger Ships Have Bigger Problems

The Baltic Exchange's Baltic Dry Index again remained steady this morning; the BDI has bounced within the limited range of 2427 and 2413 since Aug. 26. But the sector, as tracked by my Dry Bulk Shipping Index (DBSI), traded up yesterday, in line with the overall market in anticipation of this morning's employment report.

Over the past couple of weeks, panamax rates, and to some extent supramax and handysize rates, have been supporting the BDI, while capesize rates have continued to put pressure on the index. The Baltic Capesize Index (BCI) continues to move further below the psychological level of 4000, which it first broke under on Aug. 26. Since that date, capesize rates have experienced six consecutive days of declines, reaching 3651 this morning. During that period, panamax rates have strengthened to 2486 from 2085.

I anticipate that capesize rates will continue to come under pressure, while panamax rates may experience additional upside momentum, at least for the interim. However, first-quarter panamax forwards are still pricing in a decline of roughly 16%.

The U.S. employment report showed that payrolls declined by 216,000 in August, compared with a revised decline of 276,000 in July and a consensus forecast of 200,000 jobs lost. The unemployment rate for the month increased to 9.7% vs. 9.4% a month prior, and a consensus forecast of 9.5%. The declines in payrolls continue to moderate, but an increase in the labor force caused the unemployment rate to rise from 9.5% to 9.7%. This 9.7% level is the highest unemployment rate since 1983, and the U.S. economy has now lost jobs for 20 consecutive months.

Equity markets, which had been showing gains prior to the release, gave them up on the news but have since shown signs of renewed strength. In fact, the DBSI looks set to open higher this morning. I still anticipate that given sustained, albeit slowing, increments in the unemployment rate, it will top 10% prior to recovering. These data also indicate that employment continues to face strong headwinds, and a consumer-led recovery remains highly improbable.

In other news, Chinese steel prices continued yesterday's decline overnight, falling an additional 2.2%.

Baltic Exchange Indices Index 1D% 1W% 1M% 1Y% Avg. $/day BDI 0.0% -0.2% -12.9% -57.4% BCI -2.6% -7.5% -17.8% -52.6% $34,647 BPI 4.2% 15.3% -4.3% -57.5% $19,921 BSI 1.1% 0.1% -5.3% -49.9% $18,211 BHI $12,358 Dry Bulk Shipping Index 1D% 1W% 1M% 1Y% Weighting DBSI 1.5% -7.8% -9.7% -57.2% DSX 0.3% -7.3% -5.1% -47.8% 20% DRYS 1.4% -6.7% -8.5% -90.5% 31% EGLE 1.9% -8.0% -11.8% -78.5% 6% EXM 3.2% -7.0% -8.7% -75.1% 6% GNK 1.6% -8.4% -14.5% -62.2% 13% NM 3.6% -4.0% -9.1% -46.6% 9% PRGN 0.8% -4.7% -13.6% -70.9% 3% SB 0.9% -13.2% -14.2% -61.9% 8% SBLK -0.9% -4.3% -3.7% -61.8% 4% Mining Index 1D% 1W% 1M% 1Y% Last Price BHP 1.9% -2.6% -3.2% 3.7% $62.00 RTP 3.6% -0.7% -6.2% -50.3% $156.33 VALE 1.4% -2.5% -4.4% -17.2% $19.52 Source: Bloomberg; Capital Link; McDonough calculations (data as of 9/03 close)

Looking behind the details of this morning's BDI release, the Baltic Capesize Index lost an additional 2.6%, with the average daily rate for the vessels moving to US$34,647 from US$35,968 yesterday. Panamax rates continue to offset losses in the capesize sector, with the Baltic Panamax Index (BPI) gaining 4.2%. Panamax rates also continued to climb, gaining US$801 from yesterday to finish at US$19,921. Daily rates for the Baltic Supramax (BSI) and Baltic Handysize (BHI) indices moved up by 1.1% and 0.9% this morning, respectively.

My DBSI gained 1.5% yesterday, mostly because of anticipation on today's employment release and optimism stemming from Chinese government officials indicating that they may help bolster the domestic equity markets. Navios Maritime(NM Quote) was the index's best performer yesterday, with a gain of 3.2%, while Star Bulk Carriers(SBLK Quote) was the leading laggard, with a loss of 0.9%. Overall, it has been a relatively quiet week for the sector.