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Despite the Baltic Dry Index popping briefly, shipping rates are falling once again. Dry shipping is a tough sector to be in, fraught with dilution. If rates stay this low and the global economy slows, we will see M&A and bankruptcies. “We expect a marginal improvement in earnings from the third quarter but this will be too small to have any noticeable effect on industry income. We anticipate a recovery from 2017 driven by rising demand from developing Asian economies,” – Rahul Sharan, Drewry’s lead analyst for dry bulk By Parke Shall The Baltic Dry Index continues to drop with Chinese markets correcting, the global economy in question, and federal interest rate rises on the horizon. U.S. markets have led global markets in shaky trading over the last couple of weeks and many, including us, are speculating that this could be the beginning of a global slowdown in growth. The Baltic Dry Index has never seen a global recession with rates as low as they are now, and with nowhere lower to go and with oil on the rise, we think the stage could be set for some bankruptcies and dilutive offerings in the sector. It’s for this reason we suggest avoiding dry shipping altogether. Here’s the BDI over the last month, after it’s quick pop up over 1,000. (click to enlarge) It was just weeks ago when the Baltic dry Index had popped over 1,000; we came out and said not to get used to it, and that rates will continue lower again as many global economies continue to churn a little bit slower. You could see this with China’s PMI out about two or three days ago, which came in between 47 and 49. Those that follow drybulk carriers and drybulk shipping know the BDI very well. Elsewhere in the financial world, it is a semi-unknown indicator. To those that follow drybulk shipping and commodities transport (especially import/export commodities from Asia and Africa) know that the BDI is one of the key indicators as to the world’s economic view on shipping via the oceans. The index is based out of London. The simple reasoning? When there’s more demand for cross-ocean shipping of goods, rates go up. Therefore, when the price rises, productivity globally is thought to be increasing. The same goes for when rates drop, which usually signals too many carriers without enough goods to ship. Export/import shipping declines, generally seen as a signal that the global economy could once again be slowing. Our thesis now is that the BDI doesn’t have much lower it can go and the economy is shaping up to slow, not grow. With contracting demand for oil and coal and oil prices on the rise, we could be setting the stage for disaster. Look at these recent sentiments from Hellenic Shipping News , The dry bulk shipping market will remain in recession due to contracting demand for iron ore and coal, and any recovery is not expected until 2017, according to the Dry Bulk Forecaster report published by global shipping consultancy Drewry. Falling demand and oversupply has severely impacted commodity values, with iron ore and coal prices in virtual free fall. The dry bulk shipping sector has been a casualty of these developments with resultant impacts on vessel earnings. However, there is some optimism for small vessel employment, as the onset of El Nino weather conditions will increase demand in the long-haul grain trade. The depressed state of the dry bulk sector has led to doubts about the future of many shipowners and their ability to withstand prevailing market conditions. Drewry believes that the future of a number of yards and owners are at risk and further details of this analysis are available in the report. (click to enlarge) Again, we don’t feel that oil is going to head back to or under its lows again and with oil being a major expense for many dry bulk carriers, we’re wary of the effect this will have on the already dilapidated industry. It’s very difficult to recommend dry shipping stocks after the last few years that they’ve had, the questions about dilution for all of them, and the way that the global shipping market sits. We think there is a real risk of the global economy slowing down here and not only taking some you know oil and energy stocks out of their misery, but also some dry shipping carriers either being forced to merge at horrible terms, dilute heavily or go under altogether. We think investors should stay out of shipping stocks, as there’s only more bad news ahead. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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