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TheStreet Open House

Baltic Dry Index Swamped by Excess Capacity

Stocks in this article: SEA EGLE DCIX DRYS


NEW YORK ( TheStreet) -- Commodity shipping has been unable to hold on to late 2011 gains so far this year as the industry's continuing struggle with a glut of container ships sent the Baltic Dry Index to its second-worst month on record in January.

The Baltic Dry Index (BDI), a measure of shipping costs for commodities, sank 61% in January, marking the second-biggest monthly decline since the Baltic Exchange started keeping records in 1985. The last time the index took such a hit in a single-month was as the U.S. financial crisis was heating up in October 2008.

However, BDI's January tumble is not a sign for investors to panic. While the BDI is often seen as a leading economic indicator as a measure of overall demand for raw materials, the BDI's use as an indicator "really doesn't make much sense at all," dry-bulk expert Jeffrey Landsberg said.

"It's a common mistake to use the BDI as an economic indicator," said Landsberg, who runs the dry-bulk analytics shop Commodore Research & Consultancy in New York. "But it should not be used because it has little to do with demand."

A decrease in Chinese demand for iron ore contributed to January's slump, but global demand is not yet a real concern. The real weight behind last month's tumble to crisis-level lows is an abundance of shipping capacity that continues to grow at an accelerating pace as a delayed consequence of strong optimism seen in 2007 and 2008.

2012 will be the third year of robust delivery of new ships, Landsberg said, as ships ordered in 2008 and 2009 when shippers were flush with cash just now reach buyers. For Capesize vessels -- a class of some of the world's largest ships -- delivery usually takes 2.5 to 3 years after a new order is placed.

Before the shipping boom years of 2007 and 2008 when shipping rents jumped to record levels, new Capesize deliveries averaged 45 ships a year. In 2009, that number jumped to 115 and then to 214 in 2010. Last year the number of new ships delivered continued to soar to 260, and Landsberg said he expected to see an even larger amount delivered this year.

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