That Baltic Dry Index (BDI)

Our most loyal readers might remember the good old days back in April-May, when this site just started, that we wondered about the strange disconnect between stock prices and economic reality, and (what turned out to be a profitable) trade we suggested in a company named DryShip Inc. (DRYS).

We sort of concluded that it was driven almost entirely by the BDI index, which was so volatile and rather unpredictable that we left following the company. Above you can see why, sometimes a picture indeed does say more than a thousand words..

And indeed that monumental fall in the BDI has done DRYS little favours:

This graph does look strangely familiar, doesn’t it? Well, the correlation (and, in this case, causation) is eerily manifest.

The volatility in the BDI really is enormous, and although the direction was not so difficult to predict, the magnitude of it all is absolutely awe inspiring.

You might remember that DRYS took over a Norwegian deep sea rig producer, which at the time seemed to be a very smart move (both to spend the free cash flow, and to diversify away from the hyper volatility of the BDI). However, that business also has it’s prospects sullied, with the fall in energy prices deep sea drilling suddenly doesn’t look so hot anymore.

But there is also good news, the same logic will apply here as what we argued for LNG in relation to InterOil and later for energy and commodities in general, supply looks to be affected for much longer than demand, and when the latter returns to normality this can only lead to one thing, a gigantic price explosion that will even dwarf that of energy…

Baltic Dry Index Drops Below 1,000 for First Time in Six Years
By Alistair Holloway

  • Oct. 28 (Bloomberg) — The Baltic Dry Index, watched by banks including UBS AG as an economic indicator, fell below 1,000 for the first time in six years as credit turmoil curbed traders’ ability to buy cargoes and shipowners threatened to shun orders.
  • The index, a measure of commodity shipping costs, fell 66 points, or 6.3 percent, to 982 points, the lowest since Aug. 8, 2002. The gauge has dropped 89 percent this year, driving down the combined market capitalization of the 12-member Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
  • The credit crunch has spilled over to trade,” Jon Windham, a Hong Kong-based analyst with Macquarie Bank Ltd., said in an interview yesterday. “People will start anchoring ships.”
  • The International Monetary Fund predicts the world’s advanced economies will next year grow at the slowest pace since 1982. The Bank of England today estimated losses on asset-backed debt, corporate bonds and other securities in the U.K., U.S. and Europe had more than doubled since April to about $2.8 trillion.
  • Zodiac Maritime Agencies Ltd., the shipping line managed by Israel’s billionaire Ofer family, said this month it may idle 20 capesize ships, which typically haul coal and iron ore. That’s equal to about 5 percent of global capacity.
  • Shipowners are also slowing down vessels to cut fuel costs. The average capesize is sailing at 8.68 knots, down from 10.33 knots in July, according to Bloomberg calculations. Capesizes are attracting rates of $7,340 a day, close to daily operating expenses of about $6,000, according to Henrik With, a shipping analyst at DnB NOR Markets ASA in Oslo.
  • Fearnley Fonds ASA, a specialized maritime investment bank, expects “significant” numbers of commodity shippers to fail within two years. Industrial Carriers Inc., a Ukrainian operator of about 55 vessels, filed for bankruptcy protection this month.
  • Lending Rates
  • The London interbank offered rate, or Libor, the benchmark for $393 trillion of financial contracts in 2007, fell 4 basis points today to 3.47 percent for three-month loans, the British Bankers’ Association said.
  • Shipping lines are also having to contend with slowing growth in demand for most commodities. The S&P GSCI index of 24 raw materials has dropped 31 percent this month, its worst performance since at least 1970.
  • “Turbulent fiscal conditions have heightened uncertainty into the demand and supply outlook for all commodities,” Citigroup Inc. analysts Alan Heap and Alex Tonks in Sydney said in a report.
  • Steelmakers including OAO Severstal, Russia’s largest, and Posco are cutting production, sapping demand for iron ore and coking coal. The two commodities will account for about a third of the 3.2 billion metric tons of dry bulk goods shipped this year, according to Drewry Shipping Consultants Ltd.

This short article really is full of remarkable stuff:

  • One shipper anchoring 20 ships and that being equal to 5% of world capacity??
  • Or how about this: “Capesizes are attracting rates of $7,340 a day, close to daily operating expenses of about $6,000” Since rates were ten times this, dry bulk shipping really was awesomely profitable just a short while ago. Very profitable indeed.
  • And, as we argued above, looks like supply will be hurt for much longer than demand, only setting us up for an even more spectacular comeback when demand returns..