Dry Bulk Sector on Ice - TheStreet

In case you haven't heard, a massive iceberg that broke off the coast of Antarctica ten years ago is headed toward Australia, threatening shipping lanes, a phenomenon that hasn't been encountered for about a century. These days, you might think the capesize sector had run right into it. The average daily cost for the vessels, which cover the largest classes of cargo ships, has fallen from a high of $88,560 on Nov. 18 to $52,742 Tuesday morning. In fact, the shipping lanes affected by the iceberg aren't very busy. And, in case you were worried that the precipitous drop in capesize costs presages another global downturn, rates for smaller vessels, which tend to carry anything but iron ore, remain robust.

What explains the pullback in capesize rates? While on the surface, it appears ominous, the details provide a more benign outlook. First the negative, fixtures into China have fallen from an average 23 per week just over a month ago to 14 last week, and 10 two weeks prior. However, part of this decline is due to Vale's greater independence from the market. The Brazilian metals and mining giant has begun shipping more ore through its own growing fleet -- thus cutting demand for third-party ships tracked by the Baltic Dry Indices, while not actually reducing the volume of trade.

Additionally, capesize time-charter activity in November -- meaning contract bookings of one year or longer -- began picking up after three months of very little activity, and I believe this will continue in December. Concurrently, the level of time charters for panamax vessels, the largest cargo ships capable of traversing the Panama Canal, hit a 2009 monthly high, with more than 30 vessels booked in November.

The bottom line is the fall in capesize rates may be exaggerating what many could perceive as a slowdown in shipping volumes. Yet, the supramax and handysize sectors are still logging pretty stellar performance, indicating that, whatever weakness does exist, is isolated to iron ore. Panamax rates have experienced some modest depreciation, relative to the capesize sector, likely on the back of weaker sentiment toward its big brother, and some overlap in the ore trade.

Recently, the performance of my dry bulk shipping index (DBSI) has been tracking the BDI quite closely, with both indices coming off interim highs since mid-November. I maintain my neutral short-term view for the sector, and continue to prefer companies with relatively healthy balance sheets, such as

Diana Shipping

(DSX) - Get Report

, over shippers with excessive leverage, including

Dryships

(DRYS) - Get Report

. On a monthly basis,

Paragon Shipping

(PRGN)

has been the best performer of my DBSI, gaining 2.%, with

Genco Shipping

(GNK) - Get Report

at the other end, falling 15.9%. On a yearly basis,

Navios Maritime

(NM) - Get Report

has been the strongest performer, gaining 92.2%. Overall, my DBSI has gained only 0.5% since its May 22 introduction, in line with my generally bearish/neutral view on the sector.

At the time of publication, McDonough held no positions in any of the stocks mentioned.

Michael McDonough is an independent research consultant in North America and Asia. Over the past two years, he has advised hedge funds, central banks, broker-dealers and corporations on a range of economic and financial issues. He is also the creator of

Fiat Economics

, a global financial/economics blog. McDonough has worked on Wall Street as an economist, specializing in the U.S. and Latin America.