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Baltic Dry Index Rates Aren't All Wet

By JIM COLLINS
Real Money
SEP 19, 2016 | 4:18 PM EDT
Link: http://realmoney.thestreet.com/articles/09/19/2016/baltic-dry-index-rates-arent-all-wet

The Baltic Dry Index (BDI) has come roaring back to life the past two days and now sits at 836, a 2016 high and a level unthinkable when dry bulk shipping rates bottomed at 290 in mid-February.

The old heads in the shipping space always say "follow the capes." The Capesize segment (180,000 dead-weight tons) is the largest of the dry-bulk classes and is seen as a bellwether for the market.

On a cash basis, the Baltic Exchange's afternoon fixing put Capesize charter rates at $12,167 per day on Monday vs. $10,969 on Friday, an 11% increase in one trading day. So, if we're only supposed to get excited about a jump in freight rates that is driven by a spike in Capesize pricing, I think we're allowed to be excited today.

I wrote Friday about the improving conditions in the container-shipping market following the recent Hanjin Shipping bankruptcy. Even though there's absolutely zero substitution between dry-bulk cargoes and containerized ones (it's probably not a good idea to drop a shipping container filled with cell phones into the hull of a ship designed to carry coal, or vice versa), I do believe that sentiment toward the shipping sector as a whole is improving.

Thus, I believe shipping -- with its characteristically sharp and sudden swings in freight rates -- is actually one of the safest places to be in a market that's still substantially overvalued by historical standards. I believe the scrapping of older ships in dry bulk and the rationalization of tonnage in the container space (driven by problems at the Korean liner companies) have improved fundamentals for those two segments -- but only marginally. I like shipping because we're in the midst of a cyclical upturn that the market seems to be missing.

However, timing is the key. So, I wouldn't look at the resurgent BDI and draw the conclusion that Chinese growth has accelerated -- any more than I believed all the "China Is Over" nonsense that was so prevalent in the markets in January and February. Long-haul coal cargoes are in demand in China now as the government rationalizes its inefficient, dirty and at-times-dangerous domestic coal industry. It's a tailwind for Chinese coal imports, and for the rates required to hire the ships to carry those cargoes from their initiation points in Brazil, Australia and elsewhere.