Without a significant, yet unlikely, increase in global demand for Chinese goods, current imports will only add to record breaking inventory levels. China is currently at or near its maximum inventory levels; meaning it is very likely we will soon begin to see a drop in China’s extraordinary import levels. This diminishing demand will translate into a correction for the BDI and those sectors with high correlations to the index (i.e. miners, shippers, etc…)
The retraction in the BDI will be exacerbated by a record increment in fleet expansions scheduled to be completed over the next 1.5 years. In fact according to my calculations and data from Barry Rogliano Salles, a Paris based shipbroker, the size of the global capesize fleet, which is the largest class of bulk carrier, is expected to rise by 50%. Many analysts believed this magnitude of expansion was irrational even at the peak of shipping in 2008.
Currently, 10% of the estimated 855 global capesize fleet is idle off the shores of China waiting to unload at congested ports, with an average 9 day wait. The growing supply of new vessels combined with the freeing of idle ships off the coast of China will create a supply glut in the sector dragging down shipping prices. Hence my bearish short-term view on the mining sector (BHP, RTP, VALE), and my generally bearish view on the shipping industry, especially for highly leveraged shippers such as Eagle Bulk Shipping (EGLE); companies with lower leverage such as Diana Shipping (DSX) should be better positioned to weather the coming storm.
Again for more details please check out my articles on TheStreet.com.
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