Another Record Low for Baltic Dry Index

 | Feb 04, 2016 | 5:56 PM EST
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Another day, another recording-breaking low. On Thursday, the Baltic Dry Index hit 298, representing a new low for the index in its 30-year history in its current form. The dry bulk shipping industry has borne -- and will likely continue to bear -- the brunt of the decline. 

"The dry bulk market was difficult in Q4, but compared to what's happened the past two weeks, Q4 could be considered, the 'good ol' days,'" Noah Parquette of JPMorgan Securities wrote in a note released at the end of January.

Among the reasons Parquette cited for pain in the industry was the 30% year-over-year decline in Chinese coal imports as well as sluggish demand for steel and iron ore.

The Baltic Dry Index tracks the cost of shipping raw materials, such as metals, grains and fossil fuels across various trade routes. As the materials transported are pre-production materials, lower prices are considered to be a leading economic indicator for declining global demand. 

However, while the Baltic Dry Index is often cited as a demand indicator, supply issues may also be dragging the it down and this is why shipping companies are getting especially hurt. Building a vessel can take more than two years and idling one when demand is low is costly. Put simply, adding a vessel to a fleet is not a decision companies take lightly.

When global growth was stronger and financing was cheaper, some players seized the opportunity to build new vessels. Unfortunately, they may have stretched themselves thin to add to their fleets. Now that there is a fall in demand, coupled with an increase in supply, the index is well below the lows seen during the financial crisis of 2008-09 when it fell to 663.

"Heavily indebted companies have essentially forced sellers to shore up balance sheets, and the deep-value buyers have used that to their advantage to drive down prices," Parquette wrote.

It's tough to find bright spots in the industry as many of the stocks trade in the single digits and have seen their market cap severely cut over the last year.

On Thursday, Diana Shipping (DSX) announced plans to acquire three Panamex vessels for a total purchase price of $39.8 million. The vessels are expected to be delivered in March and the transaction is contingent upon Diana Shipping obtaining bank financing for the full price. Shares of the company closed up nearly 5% to $2.58 on Thursday but are down 62% over the last year.

An analyst team at Credit Suisse called the acquisition "opportunistic" but mentioned that the ships will likely start losing money once they are delivered in March. 

Both JPMorgan and Credit Suisse hold a Neutral rating on Diana Shipping, but the analysis contains caveats. 

"Dry bulk asset values have fallen substantially over the past 12 months, and the decline in the market of the company's fleet could negatively impact the company's borrowing capacity and/or result in non-compliance under restrictive covenants," Parquette wrote.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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