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Shipping

Out of the doldrums

The Baltic Dry Index (BDI), the reference for single voyage freight rates in the dry bulk shipping market, lost another 17% in November. From 1490 at the end of October, it actually dropped to around 1000 at its worst, during the third week of the month, before recouping some of its losses to close at 1231.

Graph 1 : Shipping stocks in November

bulkersEqualWeightedDSX, SBLK, SALT and GOGL equally weighted. Source : Bloomberg

Bulk shipping stocks traded in sync with the BDI index, shedding some 11% in November. Note that the BDI index subsequently posted a 9% gain in the first week of December, moving back up to 1339.

The serious correction in their stock prices has driven several bulk shipping companies to start buying back their own shares.

Indeed, their market valuations are now so low, amounting to only 60% (or even less) of book value, that ship owners prefer to use their ample free cash flow (or even sell vessels) to finance share buybacks. Bulk shipping company managers have also been reported to be buying shares at the current prices. This put some kind of a floor beneath stock prices as from the second half of November (see graph 1).

Meanwhile, sentiment has shifted somewhat in the bulker market, with the Chinese government having halted coal imports through January (for environmental reasons we suppose). This implies that Capesize vessel freight rates are subdued for this time of the year. Market watchers have thus become less optimistic, noting also that almost no older vessels are being sent to the scrapyards, while the newbuild order book has expanded to 10% of the existing fleet. With world economic growth at risk, too many new vessels might enter the market over the next two years if ship owners do not scrap older ships. That said, given the pending new (expensive) IMO rules on ballast water treatment systems and low sulphur fuel oil, we remain confident that scrapping will soon resume.

evolution capesize graphs09.18(Source : BanqueThaler; Bloomberg)

Update : December 2018

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