Dry Bulk Shipping On The Rise

Forbes.com, Ruthie Ackerman,

As freight rates push higher, investors cling to hope that the sector will improve. Investors are looking for signs of a recovery in the dry bulk shipping market, but they have to be patient:

With a large supply of ships set to be delivered and many companies facing troubled balance sheets, the road up from the bottom will be long and steep.

On Thursday, the Baltic Dry Index, which tracks dry bulk shipping rates on 40 routes across the world, jumped 14.0%, or 182 points, to 1,498, up from 1,316 on Wednesday -- the 13th straight rise.

The daily rates for Capesizes, which are the largest vessels, soared 21.5% to $26,495, up from $21,810, on Wednesday.

Smaller Panamax ships are up 12.9%, to $9,040.

If freight rates remain high for a sustained period of time, it could lead to a 20.0% rise in ship values, Dahlman Rose analyst Omar Nokta said. (See "Rough Seas For Dry Bulk Shippers.")

This is good news given that most of the dry bulk companies have breached their loan covenants due to slumping vessel values. (See "Shippers Breaking Their Covenants.")

One- and two-year Capesize charter rates would need to surpass $40,000 per day for ship values to increase 50% -- the level needed for companies to return to good standing with their lenders, Nokta added. (See "DryShips Dips Its Toe In Optimism.")

Nokta points to strengthening steel prices as the reason for stronger Capesize rates. The rise in steel prices, he says, is due to reduced stockpiles in China, a sign that more iron ore will need to be shipped. Investors hunting for a bottom in the dry bulk market should look to the Chinese steel market, says Nokta, because healthy steel mills can pay higher shipping rates for iron ore deliveries.

It's still too soon to tell if the steel price rally will be sustainable. With one-year time charter rates heading toward $30,000 per day on increased iron ore chartering into China from Australia, Brazil and India, dry bulk stocks are heading higher. (See "Dry Bulk In Iron Chains.")

But Nokta remains cautious. "Although stocks should see a stronger level of support in the short term, we maintain our cautious outlook for the group in light of the heavy financial burdens within many of the companies," he said. Cantor Fitzgerald analyst Natasha Boyden is bearish as well. She says the market shows little sign of recovering in the near term because of the large fleet supply growth on the horizon.

Even with the rise in cancellations, the supply of vessels will outpace demand. "We believe recent output cuts by major iron ore miners along with indications that Chinese industrial activity continues to weaken could make 2009 a difficult year for dry bulk rates," she said.

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