Shippers have been on a tear in the past couple of weeks in large part because of rising charter rates for shipping commodities like iron ore and grain. The Baltic Dry Index, which reflects how much it costs to move raw materials by sea, has zoomed from 1,132 on Aug. 30 to more than 2,000 this week — a far cry from the sub-700 level that kicked off 2013.
A few other reasons that dry bulk shipping stocks might continue to regain their sea legs:
- The severe oversupply of ships triggered back in the industry’s halcyon days of 2007 and 2008 is beginning to ease.
- Growth in China’s steel production — coupled with low iron ore prices — is fueling demand for that resource. Global shipments of grain also are rising rapidly.
- Rising tension in the Middle East — particularly in Egypt — raises the threat of disruptions in the Suez Canal, one of the world’s most important shipping routes. If the canal were to be unavailable to shippers, vessels would be forced to make the much longer and more hazardous voyage around the Horn of Africa to move their cargo. Greater risk means higher rates.
Before you jump into the dry bulk shipping space, it’s important to remember that the shipping industry is extremely volatile, the headwinds are strong and the market caps are comparatively small — some are lower than the cost of a single ship.
Still, big returns are certainly within these companies’ grasp, so adventurous investors should consider small allocations to some or all of the following shipping stocks: