Dry Bulk Shipping Rates: Tidal Wave of Supply Growth Still On the Way

More on the Baltic Dry Index, the index of spot rates for dry bulk commodity shipping (iron ore, coal, grains). After rallying substantially earlier this year, the BDI has pulled back substantially from 4,000 levels now to below 3,000. We had pointed out the threats to the BDI, and highlighted Transport Trackers call that BDI speculation at 4,000+ was a bad bet to be making. Well, we can further highlight the over-supply problem for dry bulk shipping, from the massive orderbook racked up during the recent bulk shipping boom. Dry bulk bulls argue that economic hardship will lead to massive orderbook cancellations, but Transport Trackers points out that even pretty aggressive ship cancellation assumptions are unlikely to change the fact that the oversupply problem is set to get worse before it gets better. Take a look at this chart from their recent piece: Note the supply growth rates for 2009-2010 and note that demand growth has fallen well below recent levels. So you have peak supply growth hitting far from peak demand growth. How can you expect anything towards peak dry bulk shipping rates? Note that BDI 4,000 is still a very strong rate vs. where it has been, shown here.

Wishful thinking: We’ve seen estimates from 15 – 50% for {cancelations-slippage-delays} of the bulk orderbook. The high end figures are wishful thinking in terms of market impact. We side with a 15% range figure, yet agree many vessels are/have been delayed. To note, when thinking of 40-50% cancelations-slippage is that also many rightly pointed out the real orderbook was perhaps 20% bigger at peak than that officially recorded back in mid-08. So, taking 40% off of the larger estimate would generate -28%, for arguments’ sake. Another trick we found was to annualize cancelation-delays based on 1Q09 world meltdown data.