There’s been a significant increase in the annual growth rate of demand for dry bulk commodities. The driving force has been the major advances in industrial development within the economies of China, India and Southeast Asia during the past five years.
This demand for raw materials by China, India and other Pan-Asian developing countries is driving record exports from the United States and other commodity-rich nations, and the effect of this demand has been the strong and firm support of freight rates.
As such, the big picture for the dry cargo markets has been changing, and a significant number of dry bulk companies have entered the U.S. public market, raising close to $2 billion in primary and follow-on offerings to fund the expansion of their fleets.
Global Trade Depends on Cargo Ships
When you consider that two-thirds of the world’s goods are transported by sea, it’s no wonder that investors would be wise to get more involved in this sector. International shipping plays a vital role in commodity trading and facilitating global trade, and that’s not going to change anytime soon. To put it in perspective, dry bulk shipping of commodities accounts for just below 40% of total seaborne freight. It’s a whopping amount of goods and a strong, high-yield sector! To learn how you can cash in on the commodity boom, you’ll want to read, “Commodities: Your Guide to Profiting Smartly.”
Dry bulk shipping is generally divided into two distinct categories: major bulks and minor bulks.
Major bulks include iron ore, coal and grain that are shipped on the larger-size vessels, called Capesize (because they can’t fit through the Panama or Suez canals and instead must sail around the Cape of Good Hope or Cape Horn) and Panamax (because they can fit through the Panama Canal), and together these vessels comprise about 65% of dry bulk trade.
Minor bulks are fertilizers, steels, sugars, cement and other commodities that are shipped in smaller, more versatile vessels called Handymax and Handysize, and they comprise about 35% of the dry bulk commodities trade.
Iron ore and coal are the two most important major bulk commodities, with about 27% and 26% of total dry bulk trade, respectively, with grain accounting for the remaining approximately 12%. These are the commodities most in demand to the world’s biggest customer China.
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A Whole New Price Range for Overseas Rates
It’s no secret that freight rates in dry bulk shipping are driven by demand and supply. Economics 101 taught us that global economic conditions affect the demand side for the cargo business, while the size and availability of the global fleet of cargo ships affect the supply side.
To answer the question about the demand side of the equation, China is expected to continue to be the driving force of the dry bulk market—and make no mistake about the significance of China to this investment theme. China’s growth will also have a positive effect on the whole region, benefiting and driving the economies of first-world countries like Japan, Korea and Taiwan, as well as developing nations such as India and Indonesia. Consequently dry bulk shipping will be required by those developing nations as a follow-on consequence.
The building of new cities in China and India, rivaling the size of New York and Los Angeles, are why I believe in the sustainability of the Chinese demand for commodities.
And the demand for iron ore and other core commodities is a “buy-product” of major infrastructure projects and large-scale industrial activity.
With the United States and Japan being able to demonstrate higher-than-normal growth rates in recent years, and the growth of China, other Asian countries and India, the stage has been set for a broad and lasting expansion in the Pan-Asian region through 2009 and beyond.
Throw in the facts that China has been readying itself for the 2008 Summer Olympics and is in the process of changing the course of the Great Yellow River (involving massive construction projects), and you get an idea of just how much iron ore it will need To get an idea of just how massive these construction projects are for China’s economy, you’ll want to read “Investment Opportunities of Olympic Proportions.”
Dry bulk shipping, commodity trading fueled by the burgeoning new markets in China, India and elsewhere, is a compelling sector for your investment dollars!
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