Insights

Why Dry Bulk Shipping Stocks Keep Falling

What happened
Since topping out at 3,369 two weeks ago, the Baltic Exchange Dry Index (BDI) — which tracks the prices that ocean transporters can get for carrying cargoes of coal, iron, grain, and other dry bulk commodities — has tumbled 25% in just 16 days. As of today, the index sits at just 2,514.  
Shares of companies engaged in the shipping of such dry bulk cargoes are following the index lower. As of 10:05 a.m. ET Wednesday, Star Bulk Carriers (NASDAQ: SBLK) has lost 9% of its value, Genco Shipping & Trading Limited (NYSE: GNK) is down 10%, and Eagle Bulk Shipping (NASDAQ: EGLE) is leading the industry lower with a 10.9% loss.
So what
Now, the good news is that this cyclical market for dry bulk shipping has been characterized by both higher highs and higher lows as it has cycled higher over the past several months, so today’s declines may not be as bad as they seem. On the other hand, though, as Hellenic Shipping News reports today, risks to demand for dry bulk cargoes are rising — and they could be long lasting.  
Two major factors explain the falloff in demand: First, China’s policy of closing down production in entire cities to contain the spread of the coronavirus has curtailed demand for industrial raw materials in that country. Second, the war in Ukraine, which has devastated Ukraine’s farming industry and closed down more than half the nation’s ports, has hurt demand for grain shipping via the Black Sea. (To be clear, demand for grain per se isn’t falling — but demand for ships to carry Ukrainian grain is, because the grain can’t get out of port.)
Image source: Getty Images.

Now what
The reasons why demand for dry bulk shipping has been curtailed also provide a glimpse at what might grow demand for dry bulk cargoes once again. As China’s economy unlocks, demand for shipments of coal and iron (for example) to that country should revive. And as the country works its way through congestion at its ports, that should accommodate greater dry bulk traffic as well.
Similarly, if the war in Ukraine has depressed demand for grain shipping, an end to that war could revive demand for grain shipping. On the other hand, if Ukraine’s grain-producing capacity has been too damaged by the time the war ends there may still be less grain to ship. (And therefore, less demand to ship it.)
On a bright note, one factor that is helping to support dry bulk shipping prices — and therefore dry bulk shipping stocks — is a dearth of supply of the ships themselves. As Hellenic Shipping reports, the construction of new dry bulk carriers “has come to a virtual halt during the first few months of 2022.”
Once demand for shipping does revive, it may be the case that this lack of construction of new ships to support ocean-going transport may have planted the seeds for a new bull market in dry bulk shipping stocks.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

What happened

Since topping out at 3,369 two weeks ago, the Baltic Exchange Dry Index (BDI) — which tracks the prices that ocean transporters can get for carrying cargoes of coal, iron, grain, and other dry bulk commodities — has tumbled 25% in just 16 days. As of today, the index sits at just 2,514.  

Shares of companies engaged in the shipping of such dry bulk cargoes are following the index lower. As of 10:05 a.m. ET Wednesday, Star Bulk Carriers (NASDAQ: SBLK) has lost 9% of its value, Genco Shipping & Trading Limited (NYSE: GNK) is down 10%, and Eagle Bulk Shipping (NASDAQ: EGLE) is leading the industry lower with a 10.9% loss.

So what

Now, the good news is that this cyclical market for dry bulk shipping has been characterized by both higher highs and higher lows as it has cycled higher over the past several months, so today’s declines may not be as bad as they seem. On the other hand, though, as Hellenic Shipping News reports today, risks to demand for dry bulk cargoes are rising — and they could be long lasting.  

Two major factors explain the falloff in demand: First, China’s policy of closing down production in entire cities to contain the spread of the coronavirus has curtailed demand for industrial raw materials in that country. Second, the war in Ukraine, which has devastated Ukraine’s farming industry and closed down more than half the nation’s ports, has hurt demand for grain shipping via the Black Sea. (To be clear, demand for grain per se isn’t falling — but demand for ships to carry Ukrainian grain is, because the grain can’t get out of port.)

Image source: Getty Images.

Now what

The reasons why demand for dry bulk shipping has been curtailed also provide a glimpse at what might grow demand for dry bulk cargoes once again. As China’s economy unlocks, demand for shipments of coal and iron (for example) to that country should revive. And as the country works its way through congestion at its ports, that should accommodate greater dry bulk traffic as well.

Similarly, if the war in Ukraine has depressed demand for grain shipping, an end to that war could revive demand for grain shipping. On the other hand, if Ukraine’s grain-producing capacity has been too damaged by the time the war ends there may still be less grain to ship. (And therefore, less demand to ship it.)

On a bright note, one factor that is helping to support dry bulk shipping prices — and therefore dry bulk shipping stocks — is a dearth of supply of the ships themselves. As Hellenic Shipping reports, the construction of new dry bulk carriers “has come to a virtual halt during the first few months of 2022.”

Once demand for shipping does revive, it may be the case that this lack of construction of new ships to support ocean-going transport may have planted the seeds for a new bull market in dry bulk shipping stocks.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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