Tuesday, October 28, 2008

Close look at the BDI, Baltic Dry Index

The Baltic Dry Index tracks charter rates for dry bulk ships. These ships carry mainly ores and grains, not liquids carried by tankers, hence the term "dry". And in bulk, not in containers.

The demand for bulk ships increased significantly when the container carriers began increasing the prices (presumably) or, at the very least, not making containers available for, commodity cargoes. This came about in the U.S. when exports began booming.

Because of this demand, charter rates on bulk ships surged from around 10,000 per day to over 100,000 per day. Absolutely crazy. Much worse than what was seen with charter rates for container ships.

In an October 24 article in American Shipper, Khalid Hashim, CEO of Thailand-based Precious Shipping, explained the reasons, as he saw them, for the dramatic decline in the Baltic Dry Index, the measuring stick for dry bulk rates.

“The deteriorating credit line led to the collapse of the BDI over the past few months, while little has changed in terms of fundamental demand and supply for dry bulk shipping,” according to notes from the JP Morgan-organized call, which took place Oct. 17. “Hashim thinks urbanization and economic advancement, which have been driving the demand for dry bulk shipping, remain unchanged. However, due to lack of trade credit, real demand is converting into potential demand and disappearing from the market.”

Today, October 28, the BDI hit a 6 year low.

Out of Barron's,

The Baltic Dry Index slid below the 1000-point mark, the first time it’s been south of four digits since August 2002, as the prices shippers are willing to pay for marine transport fall close to the costs of putting a vessel in the water and staffing it. The Baltic Dry Index has fallen 89% this year, as the credit crisis has robbed shippers of the ability to finance cargo movements. Shipowners have taken steps to reduce costs - for instance, trimming vessel speeds to save on fuel costs - but may begin to simply refuse to move cargo if pricing doesn’t show some improvement.

A lot of the bulk carriers went public in the last couple of years. The stocks were interesting as they were paying great dividends. But this is a wild, wild business, much like trading pork bellies.

It will be interesting to follow.

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