Plunging Baltic Dry Index Points to Pain in Shipping Industry

As the Baltic Dry Index hits new lows, shipping companies struggle to hold on.

As if investors needed further confirmation about a global slowdown, the Baltic Dry Index hit a new low of 303 on Wednesday morning and is down 35% so far this year.

Why does this matter? The Baltic Dry Index tracks the price of shipping raw materials, such as metals, grains, and fossil fuels across various trade routes.

As the materials used in the index are pre-production, movements in the index are considered a leading indicator for economic activity. A decline in the index means that the cost of shipping goods has gone down, which implies decreased demand.

The time to construct a vessel can take more than two years, so the index tends to be more sensitive to changes in demand for goods, than changes in the supply of ships. That said, global fleets increased rapidly while China's GDP growth hit double digits.

Shipping companies funded the growth of their fleet with debt, which may now be unsustainable amid low shipping prices. Several shipping companies are already feeling the pain.

On Wednesday, Navios Maritime Partners (NMM) announced its fourth quarter earnings as well as plans to suspend its distribution. Shares of the Monaco-based shipping company are down 90% over the last year and are trading around $1.40.

"While Navios Partners is healthy, we announced the necessary, but painful decision to eliminate distributions given our untenable cost of capital, the inability to know when markets will restore and the opportunities to acquire assets at attractive prices," CEO Angeliki Frangou said in a statement announcing the company's earnings. The company's stock is down over 35% in Wednesday trading.

Elsewhere, New York-based Eagle Bulk Shipping (EGLE) entered into a forbearance agreement with certain creditors last month after it missed a Jan. 15 payment. In its initial filing with the Securities and Exchange Commission, the company said the forbearance period would expire on Feb. 2, at which point the company hoped to have identified other financing alternatives.

However, on Feb 2., the company -- with the agreement of its creditors -- extended the forbearance period to Feb. 9. Financial troubles are not new for Eagle Bulk Shipping, as the company exited Chapter 11 bankruptcy protection in October 2014.

Is this the start of more pain in the shipping industry? The Baltic Dry Index certainly suggests so.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider NMM and EGLE to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.