Consumer Confidence Disappoints, Shipping Stocks Suffer

As I highlighted in my column on TheStreet.com on Monday shipping stocks will be highly susceptible to any major economic news impacting market's views on the long-term outlook. This mornings consumer confidence number was proof of that, tumbling to 49.3 compared to 54.8 last month. Both the present situation index and the future situation index declined. Most of the recent gains stemmed from increases in the future situation component, which fell this month to 65.5 from 71.5. The present situation index slid to 24.8 from 29.7. The drop was likely fostered by concerns over business conditions and the employment situation.

The recently high betas in the shipping sector over macro data are rooted in the hope that once Chinese demand begins to diminish for dry bulk goods, increases in ex-China demand will offset, or even more than offset, the decline in Chinese imports. But, in order for this to occur it needs to be clear that global economies, especially the US, are on the road to recovery. Any data supporting or opposing this view will significantly impact trading in the shipping sector Nevertheless, today's data may give Thursday's crucial payroll number even more ammunition in the event of an upward or downward surprise.

In other news the Case Schiller Home Price Index came in slightly above analyst's expectations showing a decline of only 18.1%.

Shipping and Mining Stocks

Source: Google (12:42PM)

FFA Market Rises

Forward Freight Agreements (FFAs), especially for capesize contracts, appreciated significantly today leading to strong trading in the dry bulk sector.

BDI FFA Curve

Source: Imarex

BCI FFA Curve

Source: Imarex

Market and Sector Performance:
Source: Bloomberg, my calculations, Capital Link Shipping

BDI to face downward pressure

As I have discussed in great detail in my TheStreet.com articles; I believe the recent rally in the Baltic Dry Index (BDI) cannot be sustained, and we are likely to see a pullback in the index; along with dry bulk shipping and mining sector stocks. The BDI’s rally has been driven almost exclusively through China’s record demand for raw material stemming from the government’s USD586bn stimulus package. Currently, despite record raw material imports China’s industrial production has actually begun to wane and export growth has turned negative. To put it simply, there’s a lot more going in than coming out; this cannot be sustained.

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.