The Most Important Number in Shipping


In Dante's Italian classic The Inferno, the sign marking the entrance to Hell reads, "Abandon all hope, ye who enter here." Unfortunately, this pretty aptly describes the outlook for investors hoping to make a buck from owning shipping stocks as well, as the Baltic Dry Index all too clearly reveals.

The Baltic what, now?
The Baltic Dry Index tracks the prices for several kinds of dry bulk shipping. It monitors those rates across 26 key shipping routes for dry bulk ships that carry commodities such as coal, iron ore, and grain.

Economists and investors monitor this figure to gauge the future direction of the shipping industry and the global economy. From an industry-specific standpoint, shippers become more profitable by charging higher prices for their services. As such, shipping investors carefully scrutinize this figure, using it as a proxy for future revenues. And since higher prices indicate greater demand to move goods from place to place, observers also use this price to glean insights into the strength of the global economy.

The latest numbers
The BDI handled another tough month, declining from 1422 to 1264, an 11.1% decline and vastly below its start-of-year level. The ever-present (at least these days) economic woes have helped to dampen excitement

The constant state of worry over Europe's future economic health (first Greece, then Spain, then Italy) has certainly given macro investors plenty to worry over. Add in a healthy dose of the fiscal uncertainty currently swirling over the United States, and you get a pretty potent recipe for investor anxiety. When you factor in the current, and continuing, supply glut plaguing the industry, it seems more than understandable that shipping rates fell during the month.

Unfortunately, this industrywide pain will probably continue to spread to individual stocks. And that probably means several more quarters of suffering for investors in big dry bulk carriers such as Diana Shipping (NYS: DSX) and DryShips (NAS: DRYS) , as well as smaller carriers such as OceanFreight (NAS: OCNFD) , Paragon Shipping (NYS: PRGN) , and Eagle Bulk Shipping (NAS: EGLE) .

The better shipping play
Several of our best-informed analysts recently weighed in on their favorite shipping plays. David Williamson highlighted some pretty interesting opportunities, including liquid natural gas transporter Golar (NAS: GLNG) , arguing that it stands the best chance to survive in the stormy seas of the shipping industry.

The dry bulk arena should remain pretty cutthroat for the time being. The pain of overcapacity issues will probably only get worse before they get better. On the other hand, the shipping industry is known for its immense cyclicality. If global demand continues to strengthen in the coming years, this glut could create a buying opportunity at some point. Just don't expect it to happen now.

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At the time thisarticle was published Andrew Tonner holds no position in any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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