Dry bulk rates continue to plummet
The cost of moving dry bulk commodities is continuing to drop.
The bellwether Baltic Dry Index fell 66 points to 982 on Tuesday, dipping below 1,000 for the first time in six years. The index had reached an all time high of 11,793 points on May 20.
The index is published by the Baltic Exchange in London, and is based on an estimate of the price of moving commodities such as coal, iron ore, and grain by sea. The index covers moving cargo on 26 key dry bulk routes in handysize, Panamax and capesize dry bulk carriers.
On a day when the Dow Jones Industrial Average climbed 889 points, several dry bulk shipping companies whose stocks trade in New York on U.S. markets hit new lows for the year or were trading close to them.
London-based Britannia Bulk Holdings Inc., whose stock trades on the New York Stock Exchange, saw its shares plummet $1.63 to 27 cents. Earlier this year its stock was trading for as much as $14.47.
In a filing with the Securities and Exchange Commission, Britannia said, “Severe adverse market conditions and the severe financial difficulties currently being experienced by the company (as well as a re-evaluation of its fleet) have resulted in a very high risk of a future violation of one or more financial covenants in the near term.”
Britannia said it is in discussion with its lenders, but it “is considering its alternatives if it is unable to reach an accommodation with the lenders, including liquidation, administration or protection under applicable bankruptcy or insolvency laws. In either case (an accommodation with the lenders or a liquidation, administration or bankruptcy), it is unlikely that the company’s shareholders would realize much, if any, value.”
Charles Rupinski, senior equity analyst for Maxim Group, said there are several reasons that the Baltic Dry Index and freight rates have plunged, including a general slowdown in the economies of China and other Asia countries.
“We were expecting a boost after the Olympics, but it did not come,” he said.
China’s large steel industry has balked at iron ore price increases being demanded from Brazil’s Vale do Rio Doce, the world’s biggest iron-ore producer, bringing to nearly a halt the huge trade, mostly carried in big Cape-size vessels, he noted. If China buys from Australia or other closer suppliers it reduces demand for ships compared to purchases from Brazil.
Some buyers of commodities such as rice and sugar have been having trouble obtaining letters of credit, preventing or delaying other shipments, he added.
“A lot of cargo is not moving and some companies are laying up tonnage,” said Rupinski, adding there are reports of about 200 ships in Greece in lay-up.
Many investors believe dry bulk stocks will rebound when credit loosens up. But Rupinski notes there is also a great deal of concern by investors about the creditworthiness of counterparties who charter ships, and whether companies will be able to continue to meet loan covenants or continue to pay heavy dividends.
Loan covenants are often based on the value of a company’s fleet, and relatively few ship sales have been made in recent weeks, making valuation of assets difficult, he said.
Earlier this month, Industrial Carriers Inc., a Ukrainian operator of about 55 ships, filed for bankruptcy.