Capesize Shipping Rates Plummet 21%

The Baltic Dry Index (BDI) rose to fame in the mid-2000s as a leading indicator of the global economy. If the BDI went up, industrial production was set to increase; if it went down, vice versa.

The BDI lost its luster as a macro bellwether during the decade after the financial crisis, as the index became overwhelmingly driven by shipping oversupply, not cargo demand.

Is it time once again to view the BDI as a signal of global industrial demand? If so, it's looking scary.

Capesize Rates Crash

There was a glimmer of hope for dry bulk in April. After an epically terrible first quarter, rates took an upward turn. They've now headed sharply back down yet again.

The BDI fell 8% on Monday, to 474 points. This marks a 37% plunge since April 20. The all-time low, 291 points, was in February 2016. A more recent low of 411 was hit on Feb. 10, driven by iron ore export woes in Brazil.

Rates for Capesizes (bulkers with a capacity of around 180,000 deadweight tons or DWT) collapsed on Monday, falling 21% in a single trading session, to $3,842 per day, according to the Baltic Exchange's 5TC index of time-charter equivalent (TCE) rates. The May-June Capesize futures contract fell 12%, to $5,200 per day.

The Capesize third-quarter futures contract closed down 4% to $9,700 per day. That contract was priced at over $13,300 per day as recently as the second half of April.

A broker report from Braemar Atlantic Securities described Monday's Capesize action as "breathless" as traders "wiped out yet another good chunk of what little value remains on the curve."

Referring to the bank holiday Friday in the U.K., a broker report from BRS said, "One would think that a long weekend would have made Cape traders more relaxed, philosophical, more open to discussions of a brighter future? No. Prompt months saw heavy selling. … Capes [are] really struggling to find a floor."

Rates for Panamaxes (65,000-90,000 DWT) did not suffer the same fall but are nonetheless down significantly over recent weeks. Since April 17, the Baltic Exchange's Panamax 4TC index is down 33% to $4,587 per day.

Public Dry Bulk Owners

Buyers of shares in tanker companies hope that currently, very high earnings will propel equity values upward. Buyers of shares in dry bulk companies know full well that current earnings are atrocious; they're betting on a second-half rate rebound. Shares of both tankers and dry bulk companies are falling.

The stock price of Scorpio Bulkers SALT sank 14% on Monday, although in this company's case, the decline is probably less a reflection on rates than on the company's earnings miss and its decision to sell $43 million worth of stock it owned in sister company Scorpio Tankers STNG.

Scorpio Bulkers — which owns a fleet of Ultramaxes (60,000-65,000 DWT) and Kamsarmaxes (82,000-83,000 DWT) — reported a net loss of $124.7 million for the first quarter of 2020 versus a net loss of $3.5 million in the same period last year. Excluding noncash items and write-downs, the adjusted net loss of $2.77 per share was worse than the loss of $2.22 per share expected by analysts.

Jefferies analyst Randy Giveans wrote in a research note on Scorpio Bulkers' results that "dry bulk demand [is being] severely impacted by COVID-19." He said the pandemic "has caused global economic activity to slow, especially in those countries with restrictive or extensive lockdowns."

The CEOs of Eagle Bulk EGLE and Genco Shipping & Trading GNK commented on coronavirus fallout during conference calls last week.

Eagle Bulk CEO Gary Vogel said that "COVID-19 has led to a massive disruption in global trade and cargo flows." He pointed to lockdown-reduced coal demand for power generation in India, the world's second-largest coal importer, as well as restrictions on ports and internal transportation, and on the supply side in countries such as South Africa.

According to Genco CEO John Wobensmith, "We really need to see India open back up again on the coal import side. We need to see Colombia really gear up on the coal mining side. In general, we need to see economies start to get back on track in the medium term, and then we should see a lift in rates."

At the closing bell on Monday, the stock of Eagle Bulk had fallen by 8% and shares of Genco were down 9%. Click for more FreightWaves/American Shipper articles by Greg Miller

Scorpio Bulker-owned SBI Rumba. Photo credit: Scorpio Bulkers