We’ve been watching the Baltic Dry Index, BDI, for a while now as it slides further and further down. The index, which measures freight rates for ships carrying commodity cargoes such as iron ore and coal, has slipped to 1,790 from about 4,200 in about a month and a half. The drop in shipping rates has depressed the value of dry bulk shippers like DryShips, Inc. (NASDAQ:DRYS), Diana Shipping Inc. (NYSE:DSX), and Genco Shipping and Trading Ltd. (NYSE:GNK). There’s even more bad news on the horizon for these shippers, based on some new evidence from A.P. Moeller Maersk (OTC:AMKBF).
Maersk Brokers have said that new dry carriers totalling 34.8 million deadweight tons, dwt, were delivered in the first half of 2010. Another 55 million dwt are on tap to be delivered by the end of the year. Maersk forecasts that 117 million dwt will be delivered in 2011.
The increase in tonnage increases competition for cargoes, and is almost certainly the cause for the dramatic drop in the BDI. Further evidence of the effect on new vessels is a report that three capesize ships, the largest in the dry bulk fleet, have been anchored in Singapore. When a large vessel is, essentially, mothballed, that means that shipping rates have fallen so far that it is no longer practical to keep a ship afloat. Capesize vessels are now being booked at $15,000/day, a price equal to the handysize carriers which displace less than 20% of capesize tonnage.
For a time, the falling BDI was thought to be connected to lower demand for commodities like iron ore. But iron ore shipments are currently stronger than ever. Seasonal demand from grain shippers helped hide the effects of the growing fleet size, which are just now becoming evident.
In a related development, demand for very large crude carriers, VLCCs, has also fallen. Day rates are down from $70,000/day to $10,000/day. VLCCs are capable of carrying up to 2 million barrels of crude, and as many as 74 ships were being used as floating storage for crude oil while the cargo owners wait for the price of crude to rise. Iran has recently released six VLCCs, with about 12 million barrels of oil, and sent the carriers to Europe.
New VLCCs are also being added a high rate, with 55-50 new tankers expected to be delivered by year-end. These deliveries are being offset somewhat as some 40 single-hulled tankers are removed from service.
The down market for VLCCs is expected to last through the rest of 2010.
DryShips and Genco are down about 30% since the beginning of the year, while Diana is off about 10%, although all are up slightly more than 1% in today’s trading.
The good news is that the collapse in the BDI probably does not indicate that the global economy is headed for the dreaded double dip. The not-so-good news is that the shipping companies are going to need an even bigger uptick in shipping than they’ve already gotten in order to soak up all the dry bulk capacity that’s coming.
Paul Ausick
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