Perhaps no other industry in the markets today has been as badly hit as the maritime shipping industry. The declines in values in this industry have been so significant, one hardly ever hears about shipping companies anymore. To appreciate how extreme the decline has been, look no further than the Baltic Dry Index, a barometer of the price of moving major raw materials by sea. The BDI measures approximately 23 shipping routes on a time charter basis.
After reaching a high of nearly 12,000, the Baltic Dry Index today sits around 600. Ten years ago, the BDI was sitting at nearly 5,000. Today, the Index is at its lowest point in 30 years. Why are shipping rates so incredibly low? The answer has more to do with supply than demand.
World trade is slowing down (China's economy is growing by 7% versus 10% plus), but the real culprit is vessel supply. Despite lower shipping rates, ship owners have continued to build ships. Because ship building is a two-three year process, this unfounded optimism by ship owners has crushed their industry. As shipping rates peaked in 2008 and 2009, ship owners went on a building spree. Three years later, as those ships were coming on board, Chinese imports in 2013 started to grow, so ship owners went on another building spree. The result is an overabundance of ships.
With where the BDI sits today, one would expect shipbuilding to freeze, and that appears to be case. With the current supply, the industry likely needs significant consolidation in order to move forward. Fewer players mean a ship owner can idle some ships without necessarily losing market share.
Just as importantly, the current price of oil is reducing fuel costs for shippers. Airlines make more money when fuel costs are low, and the same goes for shipping. That's why opportunistic investors like Howard Marks and Wilbur Ross have begun to invest here. Marks is a large investor in Eagle Bulk Shipping (EGLE), after having invested in the company's debt and having that convert to equity when the company reorganized. Marks is also a shareholder in Star Bulk Carriers (SBLK).
Interested investors should understand that shipping is a very challenging industry to be in right now, a backdrop that sets the stage for some significant returns going forward. But anyone interested should commit to the time necessary to look at all the players in determining the best opportunities. Certainly finding some that have prominent investors as shareholders is a good first step.