At Least So Far Today, Dry Bulk Stocks Higher After Big Gain In BDI

Dry bulk shippers represent the strongest group in the market today after a big jump in the Baltic Dry Index (EGLE, EXM, OCNF, GNK, DRYS, DSX all up 10%+). The entire drybulk sector has virtually collapsed over the last year in tandem with plunging charter rates as the global economy weakened materially as the credit crisis spread.

The collapse in the Baltic Dry Index (down over 90% from 2007 highs to December lows) across all vessel markets caused a decline in vessel values which lead to collapsing stock prices. The credit market meltdown has played a significant role in the fallout. Trade finance plays a vital function in the shipping industry and the inability for shippers to garner letters of credit significantly hampered activity.

This area continues to show signs of improvement. Today the stocks are all showing large moves following the biggest gain in the Baltic Dry Index since at least 1985, according to Bloomberg.com. (The Baltic Dry Index (BDI) is an index which measures the changes in prices for shipping raw materials by sea). The Baltic Index has been rising modestly off its lows for the past month, gaining more than 70% off its lows. Some of the reasons cited as the cause of the recent upturn include the resumption of activity after the end of the Chinese New Year holiday (most important to today's move); seasonal demand; iron ore restocking by Chinese steelmakers.

The fiscal stimulus program, coupled with willing flowing capital (Chinese banks have increased lending) is also playing a role. Stimulus funds will likely flow towards infrastructure projects which will increase incremental demand for iron ore and coal and ships for transport. Higher rates will help to lift vessel values which have plunged causing the entire industry to go into capital preservation mode, eliminating dividends, selling off vessels, and canceling vessel orders. Many still remain in breach of debt covenants however and equity dilution remains a key risk.

For instance, there also has been noteworthy company-related news recently that has helped buoy some of these stocks. DRYS, which was in danger of defaulting, reached a reprieve recently, as it announced that it reached an agreement with one of its lenders to restructure two loans facilities. The stock rose 25% in response to that. In addition, on 1/20 EXM announced that it canceled its obligation to buy a Supramax vessel.

Long DRYS