After a relatively promising start earlier this year, shares of the bulk commodity-shipping stocks recently ran into the economic equivalent of gale force headwinds and high seas. That's prompted a sizable sell-off in the group over the last month which is unlikely to be reversed anytime soon.
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Shipping Rates Hit The Rocks
Commodity shipping costs, as measured by the Baltic Dry Index, have basically gone into free-fall. (To learn more, please read The Baltic Dry Index: Evaluating An Economic Recovery.) Recently, the index completed its 32nd consecutive day of declines. That's the longest slump since the 34 session slump experienced by the index back in 2001. Such a drop in shipping rates is bound to put quite a dent in the earnings of such major commodity shipping operators as Dry Ships (Nasdaq:DRYS), Diana Shipping (NYSE:DSX), Eagle Bulk Shipping (Nasdaq:EGLE), Excel Maritime (NYSE:EXM) and Genco Shipping (NYSE:GNK).
Chinese Iron Ore Demand Dries Up As Economy Cools
With much of the global sea transport of commodities centered on China, recent signs of a economic slowdown there has prompted the decline in shipping rates, with the key catalyst being the drop in iron ore demand. Trade in this key steel making commodity now represents the single-biggest source of demand for dry-bulk shipping.
Since April, steel production in China, the world's largest producer, has begun to decelerate prompting a 17% drop in the price of hot-rolled steel and a 37% drop in iron ore prices. But despite the lower price for iron ore, Chinese buyers remain conspicuous by their absence from spot markets for this commodity. That suggests that demand is unlikely to recover this year, which could put added pressure on bulk carrier shipping rates.
Ship Glut Still Looms
Another factor putting downward pressure on shipping rates is the continuing specter of a huge increase in the number of new ships entering service this year and into 2011. Ships usually require about three years to build, so many of this and next year's deliveries will be the result of over-ordering that took place during the market peak in 2007 and 2008. Some analysts now estimate that about 1,400 new vessels could be coming down the slips this year compared to the average annual new build rate of 283 over the last five years. While that number is likely to come down as some shippers move to cancel orders where they can, a much higher than average number of deliveries this year and next appear unavoidable and are likely to sink rates even further.
The Bottom Line
After expanding a break-neck pace during the first quarter, China's economic growth was bound to slow down. While that may be good news to those that believe a moderate rate of economic growth there implies sustainability, it's bad news to the bulk shippers who profitability appears to have been based on the assumption that Chinese economic growth could remain high indefinitely.
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