Green Shoots Appear in the Shipping Market

It would appear that shipping stocks are back in play as the Baltic Dry Index, or BDI for short, trends higher, bringing stocks like Diana , DryShips , and Navios Maritime Partners back in play.

Baltic Dry is recovering
The Baltic Dry Index is a shipping and trade index that measures changes in the cost to transport raw materials such as metals, grains, and fossil fuels by sea. Changes in the BDI can give investors insight into global shipping supply and demand trends.

However, because the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly.

Unfortunately, this is exactly what has happened recently as the BDI has collapsed around 40% during the past month, but over the longer term things appear to be improving.

In particular, using moving averages, the BDI has recovered significantly from its lows reached during the middle of 2012.

The index's current average price taken over a period of 50 days is around 30% higher than the low printed last year. This could mean that the market has formed a bottom and is heading out the other side.

Fundamentals support growth
It would appear that underlying trends are supporting this recovery. Specifically, as the prices of dry bulk commodities such as coal and iron ore have slumped during the past few years, miners have responded by ramping up output to prevent profits from collapsing.

As a result, the demand for bulk carriers to transport the higher tonnage of commodities has been rising.

It's not just the volume of industrial dry bulk commodities that has been rising. China traded $400 billion worth of goods during 2013, making the nation the largest trader of goods on earth, and imports of everything from cotton to gold are surging into the country.

Getting it there 
All in all, as already mentioned, this is great news for dry bulk shipping companies. The greater the volume of dry bulk heading toward China, and indeed around the world, the greater the demand for boats, which will ultimately lead to higher shipping rates.

According to Clarkson, the world's leading provider of integrated shipping services, during 2013 the total amount of dry bulk cargo shipped around the world jumped 5.4% year on year, while total seaborne trade increased 3.8%.

This rate of growth was close to the average annual growth rate of the last 50 years. What's more, Clarkson reported a great improvement (decline) in the number of new builds delivered to the market during 2013.

A chronic oversupply of ships has been one of the reasons that the shipping industry has remained so depressed during the past few years.

Hundreds of new ships were purchased with cheap credit in the run-up to the financial crisis when the industry was booming, and this overhang has kept the market depressed.

However, now it appears that these order books are starting to run dry. In particular, the tanker and bulk carrier fleet grew 4.3% during 2013, roughly in line with the growth of global trade. In comparison, during 2009, 2010, 2011, and 2012, the four years when global trade remained depressed, the fleet expanded 8.4%, 10.7%, 10.4%, and 7.3% respectively.

With dry bulk volumes heading to China increasing and the global fleet shrinking, Diana Shipping, DryShips, and Navios Maritime Partners are well placed to ride a recovery.

Diana has a fleet of 35 dry bulk vessels, and currently only two of these Panamax vessels are employed by Rio Tinto -- the rest are employed by agricultural trading houses such as Cargill and EDF Trading. Further, the company has a number of new vessels entering its fleet over the next few quarters, and these could be quickly snapped up by miners.

On the safer side of things, Navios Maritime Partners operates under fixed-rate, long-term contracts. In fact, 74% of its available days are already contracted out for 2014, and CFO Efstratios Desypris pointed out, during the fourth quarter earnings conference call that over 92% of the company's contracted revenue is for over three years.

Navios Maritime's average charter-out rate for its vessels is $24,233 for 2014, well above the current spot rates for all types of dry bulk vessels.

Foolish summary
So overall things are improving within the shipping industry, although it's too early to call a full recovery just yet. Trade flows around the world are rising, and volumes of dry bulk commodities shipped are also rising. After several years of overcapacity, it looks as if the shipping industry might be starting to return to normal.

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Rupert Hargreaves owns shares of DryShips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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