The Baltic Dry Index is quickly approaching its 2016 peak, and on Friday reached 1205 points, just shy of its November high of 1257 points.
The BDI has staged a significant recovery since hitting 290 points last February, but in an interview with Hellenic Shipping News, BIMCO’s Chief Shipping Analyst Peter Sand said Dry bulk ship owners must avoid getting “caught up in the moment.” Sand added that even though the BDI has recovered the market is still not profitable for most shipowners. Looking forward, for the BDI to see higher prices Sand said it will have to come from the demand side with demolition rates already below 2016 levels.
The main reason that the BDI collapsed was a glut of ships. While the plunge in demand to ship raw materials during the Great Recession pressured the BDI, the BDI did not recover when demand started to improve because a large amount of new ships that brought into service. These ships were planned during the prior economic expansion and due to the length of time it takes for new builds, and they came online at a bad time. Now, the market is still dealing with the oversupply of ships and as Sand says, new demand growth is required, particularly if new builds continue, in order for the BDI to gain strength to the point where shipping is profitable for everyone.
But, there are concerns when it comes to demand growth. Right now the BDI is finding support from increased demand for capesize ships as China imports raw materials essential for the country’s infrastructure development. Over the longer term, it is uncertain if China’s infrastructure development is sustainable. A pullback in demand for new infrastructure would hit demand for raw materials, and therefore demand for ships to transport these materials into the nation. So, even though the recent rally in the BDI is encouraging, we are in no way out of the woods yet.