Shipping Stocks Rally On Increased Output

It is no secret the shipping industry was hit hard by the financial meltdown a few years ago. All but seven of the big 30 shipping companies lost money in 2012. That said, it may be worthwhile to look at the companies that came out the other side turning a profit once again.

The Baltic Dry Index (BDI), a measure of commodity shipping costs, has declined 53 percent in 2014. That may sound terrible considering the move higher in equities, but the last few weeks have been promising. Since hitting a low on July 22 the index has risen by 44 percent.

Since the BDI tracks the average cost to ship raw materials this decline in price could suggest the demand for shipped materials was declining. But other factors suggest the contrary. Prices are on the rise, and loads could be boosted by an increased production of iron ore. The three largest companies have mentioned they will boost production in the second half of the year. One important emerging market player, Brazil, plans to double ore output over the next five years.

With emerging markets around the world planning to rapidly increase raw material output, you could see shipping companies taking a number of their ships off long-term contracts and putting them into more lucrative but volatile day rates.

Guggenheim Shipping ETF SEA is a good way to break into the industry and gain exposure to 25 of the largest publically traded companies in the sector.

SEA has a solid chart over the last two years since the shipping industry bottomed out after a big swoon. Year-to-date the ETF is up 27 percent, easily outpacing the broader indices around the globe. This is on top of a 37 percent increase in 2013 and 12 percent gain in 2012. The 44 percent crash in 2011 still has investors hesitant when it comes to the economically sensitive sector.

The big gains this year have SEA trading near a three-year high and a close above $23.26 would be a major breakout. That being said, the ETF has only had one losing session in the last ten and a normal pullback/consolidation may be on the horizon. There is also support at $22.25 that could prove to be a solid buying opportunity on any weakness.