Drybulk Carriers Fall on Dubai Concerns and Profit-Taking
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DryShips Inc. (DRYS), Star Bulk Carriers Corp. (SBLK), Euroseas Ltd. (ESEA) and other dry bulk shippers fell during the session as concerns about Dubai’s major debt issues shook the BDI.
The Baltic Dry Index (BDI), which measures dry bulk shipping rates industry-wide, dropped around 3% during the session amid concerns that Dubai’s multi-billion dollar debt problems. Meanwhile, many analysts also believe that profit-taking was overdue after the index hit a 14-month high of 4,381 over the past few weeks due largely to temporary catalysts.
The surge in dry bulk rates over the past two weeks was largely due to increased port congestion and strong iron ore and coal imports into China. The country’s steel output has been at record levels due to its $586 billion stimulus package that is expected to wind down through 2010. As a result, many analysts are concerned that the move may have only been a seasonal surge.
The dry bulk industry also faces some issues with the coming glut of new vessels coming online in 2010 and 2011, although this has largely been priced into the stocks. Many industry veterans have projected flat and volatile rates over the next two years, considering the large number of new vessel deliveries and economic uncertainty around the globe.
Meanwhile, Dubai World, the emirate’s investment arm, said that it would not be able to make on-time payments for some of its $59 billion in debt. Despite efforts by the central bank in the U.A.E. to reassure investors by pledging to make extra financing available, the Dubai stock market dropped around 7% and caused a global move away from risky assets.
At the same time, many European investors also fear the possibility of default from countries with large fiscal imbalances, like Ireland and Greece. Obviously, decreased demand for shipments of dry bulk products, ranging from agricultural products to iron ore for steelmaking, could provide yet another weight on an already troubled sector.
However, many experts believe that the Dubai crisis will likely remain regional and may even create a buying opportunity for the rest of the world’s markets that have been taken down as a result. This would also imply that concerns about the impact on the dry bulk index could be over-exaggerated, and a short-term bounce could be in order later this week when the dust settles.
In the end, the fundamental surrounding the dry bulk sector could cap its upside in the medium-to-long-term. However, a short-term drop due to events transpiring in Dubai may not have a lasting impact on the sector like many investors fear.
The Takeaway…
- The Baltic Drybulk Index (BDI) dropped nearly 3% during the session due to concerns about Dubai and profit-taking after a streak higher.
- Fundamentals in the dry bulk industry remain questionable with a large amount of new vessels coming online, but this may already be priced into the stocks.
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