Baltic Dry Index Swamped by Excess Capacity


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.

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.

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