Baltic Index rally seasonal, short-term; outlook cautious

The Baltic Dry Freight Index has touched a 14-month high of 4,381. The surge in dry bulk rates over the past two weeks was due to increased port congestion. Strong iron ore and coal imports into China which had intensified ship congestion outside key ports. China's steel output has been at record levels for the past three consecutive months due to the government's 4 trillion yuan (USD 586 billion) stimulus package. However, question marks still remain on whether the industry has turnaround or is it just a seasonal rally which will fizzle out in a few days.

History, journey till date:

The Baltic Dry Index keeps track of changes in the price of shipping commodities. The dry bulk cargo market consists of major bulk commodities including iron ore, coal and grain; and minor bulk cargo like steel, agricultural products, bauxite, alumina, petcoke, cement, sugar, salt, minerals, scrap metal and pig iron.

The Index has had a roller coaster ride in last two years. The index touched an all-time low of 650 before touching a record high of 11,760 last year. The index had lost more than 95% from its peak. Even after a rebound from lower levels, the index is still down 60% from its peak.

Is this a short-term rally?

Vikram Suryavanshi of Karvy Stock Broking views this rally as seasonal and short-term. "The rally has been caused by the spurt in demand for coal from China on account of the early winter in the north. The short seasonal run up will not benefit shipping stocks. We expect freight rates in the dry bulk segment to decline once this congestion eases in the coming weeks.

The Baltic Dry bulk index comprises of Capesize, Panamax and Supramax indices. The major upmove has been in Capesize vessels which are used for coal transport. There is marginal recovery in smaller Supramax carriers. He believes freight rates will come down to normal level once the port congestion eases and seasonal demand cools down.

The freight rates for Very Large Crude Carriers (VLCC) are USD 16,528 per day. For the Suezmax segment, it is at USD 15,500 per day which are 80% lower from the high of May 2008 and  60% lower on a year-on-year basis inspite of recovery since August 2009.

The all-time high order book in almost all segments is expected to impact recovery in freight rates going ahead. The new delivery of vessels particularly in 2010 and 2011 is expected to extend the weak freight rate scenario in the dry bulk sector.

What's the industry saying?

V Ashok, Director and CFO, Essar Shipping, remains cautious on the outlook of sector. “We will have to see how these freight markets behave in the next 6-12 months before we form any conclusion on the outlook for the markets in the near-term. We still hold the view that the markets would remain flat and volatile in the next two years, considering the huge amount of new deliveries will hit the market in the 18-24 months."

Commenting on the financials, he says, "I don’t think this present volatility in terms of a surge in the freight rates affects financials as much as the market seems they would."

How should you trade shipping stocks?

Hemen Kapadia of chartpundit.com recommends booking profits at current levels. "Shipping looks good, especially Shipping Corporation, Great Eastern, and Mercator Lines in that order. But the markets appear wobbly and despite the anticipated bounce from an intraday point of view, we are going to see further pressure. Keeping that in mind, I would prefer to book profits."

Book profits now, says Baliga. He feels it is totally misplaced when people buy stocks just because the Baltic Trade Index is moving up. "The Panamax and Supermax Index within Baltic has hardly moved. The Baltic index has moved up because of conditions in Chinese ports. Rates have actually moved up from USD 30,000 to USD 90,000. But the longer-term charter is still stuck at USD 19,000 levels. There is no correlation of the Baltic freight index with Indian shipping companies, especially Great Eastern Shipping or Mercator Lines. But inspite of that when you have these stocks moving up 20-30% in such a short while, I think it is prudent to book out."

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