More than one way, actually…
First, the Baltic Dry Index. We’ve written before on this highly volatile index of bulk commodity shipping rates. Here is another good article:
Following the Bouncing Baltic Dry Index
By Julian Murdoch
Mid-February may seem like an odd time to look at 2009’s shipping year in review. But as we enter earnings reporting season, now is actually the ideal time to revisit the things that were for shipping companies, as well as look ahead to what may come.
And 2009 was a heck of a year. Just look at the Baltic Dry Index:
As we’ve discussed previously, the Baltic Dry Index [BDI] gives an idea of the spot price for hiring a commodity-carrying ship at a given point in time. (These ships tend to carry dry-bulk goods like ores, such as iron and coal.)
As a composite of the three major ship types on four main shipping routes, the index value itself doesn’t divulge specific shipping rates. But a high BDI value generally means the cost of hiring a boat is also high, making the index a good proxy for the health of global trade.
After hitting a low of 772 in January, the index performed true to character; that is, with huge volatility, moving up and down in rapid succession. When the economy went to hell in a handbasket, the BDI was right there with it. Shipping rates dropped so low that ship owners were mothballing their fleets or even scrapping the old ships because they were no longer profitable to sail; their boats were worth more in pieces.
But the Baltic Dry Index did manage to sustain a much higher average of 2658 points, and currently, the index is slightly below that average, sitting at 2571. That’s better news for shipping demand, but it’s still well off its 2008 record high of 11,793 points.
As far as the individual ships comprising the Baltic Dry, they’re also a far cry from their 2008 levels. As of Friday, daily spot charter rates for the monster 150,000+ ton capesize vessels hit $29,259/day, with the much smaller Panamax ships running $24,383/day. But back in May ’08 when the BDI was at record highs, capesize charters had hit a breathtaking $230,000/day.
Overall in 2009, despite occasional glimpses of global recovery, charter rates never got anywhere near that high, although rates in May and November did hover around the $90,000 mark. Given that Drewry Shipping Consultants Ltd. estimates the daily overhead on a capesize to be about $7,555, ship owners have still seen a decent profit margin, even at today’s much lower charter prices.
An early read on 4Q earnings (and thus the health of the industry) came last week from shipper Safe Bulkers (NYSEArca: SB).
While Safe Bulkers missed analysts’ expectations of $0.45 per share, it still managed to survive 2009 nicely. In its fourth quarter 2009, the company saw net income rise 95 percent year-over-year, $11.9 million to $23.2 million (or $.42 per share). That said, fourth-quarter revenue fell 22 percent from 2008, to hit $36.6 million.
But it’s still too early in the earnings season to draw too many conclusions. Other companies to report 4Q results this month include Paragon Shipping (Nasdaq: PRGN) on Feb. 22, Star Bulk Carriers (Nasdaq: SBLK) on Feb. 23 and Genco Shipping (NYSE: GNK) on Feb 24.
Predicting The Future
Since most public shipping companies have their ships chartered out on long-term charters, it is fairly easy to reliably predict company returns three months out. But what counts long term is where shipping rates are headed, and that can be harder to forecast.
If you want to know what the word is on the street, a recent poll by theStreet.com says a majority of readers think dry-bulk rates will rise, to the $30,000 to $40,000 range. But what do the analysts say?
Analyst Omar Nokta, from boutique investment bank Dahlman Rose in New York, forecasts average capesize rates in 2010 of $45,000 a day. But he’s on the high side, compared with a Bloomberg survey of 11 analysts, who predicted an average of $39,000/day in the fourth quarter.
That figure sounds reasonable, until you look at that period’s forward freight agreements [FFAs], which are traded by ship brokers and others in the industry to hedge against future dry-bulk shipping rates. According to Bloomberg data, 4Q FFAs suggest rates more along the lines of $29,825—up from what we’re seeing now, but vastly different from what the 11 analysts contacted have forecasted.
Still, the Bloomberg analysts are not alone in their optimism. In mid-January, China Cosco Holdings Co. said that commodity shipping rates will rise as much as 54 percent from 2009’s levels, all because of demand from China.
It always seems to come back to China. China ships in a lot of its raw materials, such as iron ore and coal, and with the economy expected to grow around 9.5 percent in 2010, there will be a lot of iron ore and coal traveling across the sea. In fact, Bloomberg reported that Clarkson Plc, the world’s biggest shipbroker, is expecting global seaborne iron ore trade to grow 11 percent this year, to over 1 billion metric tons. Coal shipping is also expected to grow—up 4 percent to 668 million tons.
But the demand is not guaranteed, and the fact that China shipped 25 percent less iron ore in January than in December could be a sign to be cautious.
Higher Demand, But More Ships
Signs may point to an increase in shipping demand, but it appears the supply of available ships may rise as well. Plenty of new ships are scheduled for delivery this year—the global capesize fleet alone is expected to grow by a quarter—and that’s even with some companies canceling or delaying their deliveries.
If too many new ships come online, that will inevitably depress shipping rates, and that fear may be what’s driving the lower FFA numbers. Just look at a snapshot of FFA numbers for capesize vessels, taken from CTRB Freight Investor Services yesterday:
Apr – Jun 2010: 33,750
Jul – Sept 2010: 31,500
Oct – Dec 2010: 29,500
Jan – Mar 2011: 27,500
And it doesn’t get much better the further out on the calendar you look: The FFAs put the average capesize charter rates at an average of 26,000 for 2011; 25,000 for 2012; and 24,500 for 2013. In other words, the FFAs predict a short-term rise in charter rates, only to be followed by another prolonged dip by 4Q 2010.
The thing to keep in mind is that only a finite number of ports in the world can handle loading and unloading these huge ships, and there’s only so much companies can do to speed up the loading throughput. The result is what we’re seeing in Newcastle right now, with 55 ships waiting to take on cargo, whereas this time last year, there were only 17.
Bloomberg quotes Philippe van den Abeele of Castalia Fund Management Ltd. as saying: “Once congestion is really taking a grip, you can have 12 percent of the fleet stuck in ports.” That’s a lot of ships effectively out of the market as they wait to load or unload.
Of course, Mr. van den Abeele also says charter rates “will improve irrespective of the number of ships out there.” A very bullish position, indeed.
How To Play Shipping Rates
If you agree that shipping rates will skyrocket, you might be considering snapping up the Claymore/Delta Global Shipping ETF (NYSE Arca: SEA) to play rising rates. Unfortunately, SEA has proven tremendously bad at capturing the actual movements in the Baltic Dry, which is evident when you compare the performance of each since January 2009, normalized:
But if you’re inclined to believe the FFA predictions of a steady drop in shipping rates as more ships come online, you may want to look at a shorter-term strategy, or just steer clear of the industry entirely.
Either way, 2010 will be another interesting year—and we’re keeping our eyes on which way the rates will go.
———[End of article]————
Copper/Gold Ratio As Predictor For S&P 500
On Wall Street copper is give the title of “Dr. Copper” because of its ability to predict future economic activity. When the price of copper falls relative to its prior annual price, we usually head into a recession. But we can’t look at copper priced in dollars – they are useless after all, aren’t they? – instead let’s look at copper in terms of ‘real money’. Gold.
It turns out that copper priced relative to gold is actually very correlated to the equity markets. And not only correlated, it tends to predict a few months ahead of time where the stock market is headed.
Take a look at the chart which David Rosenberg shared in his recent market commentary. It originally comes from FT’s short view column (and video). You can click the chart to get a larger version:
I don’t think that is a result of data mining. Copper is used in almost every single part of global industry and gold is a barometer of monetary and systematic risk. So put the two together and you have a single indicator that reflects economic activity. According to Gluskin Sheff the copper/gold ratio has a 95% correlation with the S&P 500.
Needless to say, the hard right edge of the chart doesn’t look all that healthy right now.