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.
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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