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Baltic Dry Index Swamped by Excess Capacity

Stocks in this article: SEA EGLE DCIX DRYS

With such a remarkable rate of capacity expansion, it's little wonder as to why rents have dropped. Add to that overall trend the "January effect" and last month's numbers were destined to drop. The "January effect," what Landsberg calls the tendency of shipping companies to delay the delivery of new ships to the new year to achieve a younger build-date, annually results in a larger-than-normal inventory deliveries in the first month of the year.

January's drop was abnormally large, but a drop in January is a normal tendency. The BDI has slipped in the month 10 of the last 15 years.

However, a bottom may be near for the struggling index, which sank to 680 yesterday -- its lowest level since Dec. 9, 2008, and a level the index has only fallen below five times in the past two decades.

As the "January effect" passes, vessel scrapping is expected to accelerate this month. Increasing global scrap steel prices have added an incentive for shippers to offset the increase in capacity by scrapping older vessels. Last month the number of scrapped ships increased to 30 from 20 the prior month, and Landsberg expects that upward trend to continue into February.

"The index is going to bottom soon," Landsberg said. "But that is not saying much since it so low."

However, investors in the industry's shipping industry didn't share the BDI's pessimism as the Guggenheim Shipping ETF surged 12% in January to outperform the general market. Eagle Bulk Shipping (EGLE) more than doubled its share price last month to $1.42, while Diana Containerships (DCIX) surged 27% to $6.88. DryShips (DRYS), which has sought to protect itself from falling rents by diversifying into oil dripping, also saw strong gains in January, climbing 11% to $2.22.

Paragon Shipping (PRGN) and Box Ships (TEU) were exceptions to the strong shipping gains, erasing 11% and 2%, respectively, in January.

-- Written by Kaitlyn Kiernan in New York.

>To contact the writer of this article, click here: Kaitlyn Kiernan

To follow the writer on Twitter, go to @Kaitlyn_Kiernan.

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