What a week in the world of dry bulk shipping. One would think loading a vessel with 180,000 tons of coal, iron ore or grain and shipping it 7,500 miles would be a predictable, almost boring business, but that has not been the case since the election. I have mentioned the Baltic Dry Index (BDI) many times in recent columns for Real Money, and the index today fixed at 1257, a level not seen since the midsummer rally of 2015 and not sustainably held (i.e., for months, not days) since late 2014.
By my calculations, the BDI has risen 44% since Sept. 30. The fourth quarter's average BDI reading of 919 compares to 736, 604 and 357, respectively, for the preceding three quarters of 2016 and the 35-year low of 290, reached on Feb. 10. So The Donald hasn't driven most of the improvement in dry bulk shipping rates; they were clearly in an uptrend prior to his election.
I was fortunate enough to have a private call with Navios Maritime Partners (NMM) executives after their third-quarter call Monday. Tom Beney, Navios' senior vice president for commercial affairs and a 25-year shipping veteran, offered a few non-political reasons for the recent renaissance in dry bulk rates.
The strength is coming from the Atlantic market. Beney noted that as the Pacific -- with mega-commodity consumer China as a terminal for many cargoes -- is usually stronger, it takes higher rates for Atlantic cargoes to get chartering managers to switch. Well, as of today's fixing, Capesize dollar rates are $19,364 vs. $5,211 at this time last year, so chartering managers are clearly incentivized to move those Atlantic cargoes.
Beney noted North American grains (2016 was a very strong harvest for wheat, corn and soybeans), Great Lakes iron ore and coal from both U.S. and Colombian exporters as cargoes in demand from commodity purchasers in the current market.
So, as so often happens in dry bulk, the ships aren't in the right places (for charterers) and that has driven a beautiful market (for owners) in the past two weeks.
Will it last?
That is a very tough question. Beney noted that there is normally a pronounced pullback in charter rates for dry bulk ships in the first quarter. Given the current mania in the space, however, he was unwilling to predict that the normal seasonal slowdown would recur. I think there will be a slight correction, for technical reasons, if for no other.
Remember that there is a dry bulk futures market (for forward freight agreements, or FFA) as well as a physical market (represented by the BDI). In this type of environment, the paper market can serve as a limiting factor to irrational exuberance in the physical market. That phenomenon is common on the market for crude oil, and arbitrage has its place in the efficient functioning of markets.
Real-time FFA quotes are hard to find for non-professionals, but the most recent commentaries I have read have noted that FFAs for smaller ships -- panamax and supramax -- are jumping, especially for Atlantic routes. That tells me there aren't enough Capesizes to fill demand, and that this rally is most likely more than just a short-term spike.
I believe we will eventually see a pullback -- likely ahead of China's Golden Week Lunar New Year holiday, if not a few weeks sooner -- but the recent movement in the FFAs makes me think we haven't seen the limit of rate improvement in the near term.
So, what about the stocks? Navios Maritime (NM) has been my Real Money Best Idea since January and I am not changing that pick. NM shares have gone on a wild ride this week, and the company reports earnings Tuesday. Shares of other dry bulk shippers, especially DryShips (DRYS) , have been even more volatile than NM this week.
What's the next direction for dry bulk stocks? Alas, I have reached my space limit, so you'll have to wait until my Monday column for company-specific analyses.