24 April 2016

Baltic Dry Index Ends Two Month Rally

The Baltic Dry Index (BDI) ended its impressive two-month run on Wednesday, with the index declining two points to 669 after gaining in value every session since Feb. 10th, when it touched a historic low of 290 points.

cargo ship baltic dry index

The index has recovered nicely, it peaked at 671 points – a five-month high, but is still very depressed. The BDI peaked at above 11,000 points in 2008. While the hire rates for all the component ships that make up the BDI have seen recent strength, demand and rates for capesize ships have been the most robust. Capesize ships transport primarily iron ore and coal and they have benefitted from strength in China’s steel sector.

China’s steel sector has staged an impressive performance this year, with steel prices climbing over 40% in the first months of the year as China increased its steel operations as the country picked up infrastructure development. This fundamental change is welcome after a few years of weak property development in the nation, which contributed to the decline in BDI activity.

The pick up in steel prices has meant the ramp up of previously mothballed operations, and has resulted in increased demand for iron ore, which has buoyed the BDI. Demand for other component ships has also improved, with soft commodities transport picking up as we enter harvest season for many of the world’s major cash crops. Seasonality could contribute to increased demand through the end of May.

Demand for capesize ships fell on Wednesday and this contributed to the BDI’s overall decline.

Rates on Brazil-China and Western Australia-China runs saw the biggest falls, Atlantic and Pacific basins.

Although BDI prices are picking up, the recovery has not been enough to really impact the bottom lines of shipping companies and we may still continue to see some scrapping of ships, which would support more upside. An oversupply of ships was a major factor that drove prices lower, as a large amount of ships were built in the last economic expansion cycle and due to the time it takes to bring a ship into service they entered the market as the economy collapsed. The supply side of the market needs some major balancing; and recently there has been an increase in ship scrapping with 943 ships scrapped in the first quarter of 2016.

Source: economiccalendar.com. 20 April 2016

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