1 reason the Baltic Dry Index can eventually rise to 2,000

 

Dry bulk shipping investors' must-know mid-2014 overview (Part 11 of 11)

 

 

By Xun Yao Chen - Disclosure  • Jun 27, 2014 1:05 pm EDT

Newbuild prices

 

Historic shipping cycles might suggest limited upsides for dry bulk shipping companies such as DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Diana Shipping Inc. (DSX) over the medium-to-long term, which would also affect the Guggenheim Shipping ETF (SEA). However, newbuild prices may suggest something different over the long run.

 

Enlarge Graph

While we couldn’t get our hands on vessel prices going back to 1985, RS Platou Economic Research’s data on newbuild prices suggest lows of ~$33 million for Capesize vessels and ~$20 million for Kamsarmax or Panamax vessels in 2002. Back then, the Baltic Dry Index—the benchmark for dry bulk shipping rates—stood at levels similar to 2012′s and 2013′s. You could say 700 is the trough for the Baltic Dry Index, because if it went any lower, the industry wouldn’t exist and there would be no trade.

 

High vessel prices

 

In early 2013, however, newbuild vessel prices for bulk vessels bottomed out ~30% higher than they were in the early 2000s. Since ship buyers have to earn appropriate returns for investors, the large amount of orders placed in 2013 might have been driven by expectations that the Baltic Dry Index would reach 2,000 and higher in a few years, seeing that the index has risen to as high as 11,000. This assumes that operating costs over the last 20 years haven’t fallen.

 

Given the high newbuild prices, ship buyers have been ordering fewer new vessels, which could pressure newbuild prices. But as long as newbuild prices don’t fall substantially, the Baltic Dry Index will very likely eventually rise up to 2,000-plus. This is one of the key reasons dry bulk shipping companies have found support over the last two months. In any case, it’s quite unlikely that we’d see shipping companies fall all the way down to 2013 lows over the short-to-long term—unless world trade slows dramatically.