Container shipping is in uncharted territory. There has never been a crazy boom like this in its history. But as anyone accustomed to maritime transport will tell you, there was indeed a crazy boom like this in another sector: dry bulk around 2007-2008.

It’s worth revisiting that earlier shipping mega-peak. First of all, to compare and contrast with the meteoric rise in profits from container shipping this year. And second, to put into perspective the current dry bulk rates – which are at decade highs and continue to rise.

Dry bulk rates from time to time

“Although dry bulk freight rates and vessel values ​​are currently high compared to the past 10 years, they are a far cry from the profits seen over the 2007-2008 period and there is no indication that they are heading in this direction, ”said Peter Sand, Head of Navigation. analyst at maritime association BIMCO, in a report last week. Sand said bulk carrier owners “should recognize that this is unlikely to be the start of a super-cycle.”

The Baltic Dry Index (BDI), a basket of rates covering different sizes of bulk carriers, recently crossed 4,000 points for the first time since 2009. It closed at 4,201 on Tuesday. But the all-time high is 11,793 – nearly triple the current level – recorded on May 20, 2008.

The Baltic Capesize Index, which tracks large bulk carriers by around 180,000 deadweight tons (DWT), has just passed 6,000 points for the first time since 2009. It closed at 6,206 on Tuesday. But that’s still a long way from the historic peak of 19,687 on June 5, 2008.

(Chart: US shipper based on data from Baltic Exchange)

American Shipper has an archive of financial analyst reports on state-owned dry bulk companies dating back to the previous boom. These historical client ratings provide a window into just how extreme the market was; analysts then casually commented on rates that would seem implausible today.

Capesize spot rates on Tuesday were equivalent to $ 51,500 per day, according to Clarksons Platou Securities. For context, in June 2008, rates would have been 4.5 times higher, briefly reaching $ 233,000 per day, according to a note from investment bank Dahlman Rose client (the bank was sold to Cowen in 2013 ). At that time, a 5-year-old Capesize sold for $ 150 million; they’re going for $ 44 million today (excerpts from Dahlman Rose Marine Transport Weekly: June 9, 2008 here).

Rates for mid-size Panamax bulk carriers (65,000 to 90,000 DWT) are now $ 34,300 per day. In May 2008, they peaked at $ 91,700 per day.

Rates for Supramax bulk carriers (45,000 to 60,000 DWT) are $ 36,300 per day, half of their May 2008 peak of $ 70,500 per day. And the rates for Handysize (up to 35,000 DWT) are $ 33,900 per day, still well below the record high of $ 49,300 in May 2008 reported by Dahlman Rose.

Randy Giveans of Jefferies (Photo: John Galayda / Marine Money)

When asked to compare the current dry bulk market to the super peak of the 2000s, Jefferies shipping analyst Randy Giveans told American Shipper, “I’m not saying rates are going back to 2008 levels. What I’m saying is this decade is going to be better than the last decade. Over the past decade, the BDI averaged 1,250 and never exceeded 2,000 for more than very short periods of time.

“Few of the current investors were present in 2000-2010 and realize that the BDI can reach 10,000. No one has even seen it above 4,000 in over a decade, so of course when they do. see 4000, they think he’s going to collapse and there’s no way he can go any higher. If you look at a 10-year chart, that makes sense. If you look at a 20-year chart, you realize that this is not unfamiliar territory at all.

“I don’t think the BDI will go back to 10,000, but I also don’t think it will go back to an average of 1,250. I think it will be somewhere in the middle,” Giveans said.

Dynamic container vs dry bulk

Maritime tariffs follow the same dynamic, whether it is dry bulk, containers or tankers: spot tariffs are extremely elastic, not bound by price regulation and increase until transport costs. wipe out shippers’ profit margins when demand significantly exceeds supply from ships. As a Greek maritime saying goes, “98 ships and 101 cargoes, boom. Ninety-eight cargoes and 101 ships, bust.

On the one hand, there is a glaring difference between the current dry bulk market and the market of the 2000s: the latter was fueled by an unprecedented increase in imports of raw materials by China. The growth in demand today is not comparable.

On the other hand, rate dynamics are not only about demand, they are about supply versus demand. Much of the current rate frenzy in container shipping is not due to higher demand – demand is unusually high in the United States but average globally – rather it is due to supply. limited by congestion.

Dry bulk capacity is also severely limited by congestion – 16% of capacity was stuck in queues in mid-August – and the order book only represents 7% of the water fleet, new orders for bulk carriers being blocked by those for new container ships and gas carriers.

Giveans agreed that vessel supply constraints could certainly push dry bulk rates up in the coming months. However, he sees limits to what is currently happening in containers and what has happened in the past for dry bulk.

“Containers have a higher margin between the cost of shipping and the goods being shipped,” he said. “If you have a high-margin item like a pair of shoes that costs $ 20 to produce and you can sell for $ 150, you can pay $ 100 to ship it and still make a profit.” Considering the number of shoes that can fit in a container, the high-margin shoe importer can still make a profit by paying $ 20,000 per unit of forty-foot equivalent on the trans-Pacific.

The same calculation applies to the shipment of iron ore from Brazil to China or coal from Indonesia to China. The gap between production costs and delivered price implies how much dry bulk rates can increase. “Containerized goods probably have a higher margin [than dry bulk]”Said Giveans.

He also believes there was a more pressing demand from China to import dry raw materials in the 2000s super-cycle than today, providing more leeway for extremely high transportation costs at the time. former. “With China’s accession to the WTO and the organization of the Olympic Games in August 2008 and the need to build infrastructure, there was more urgency then than today. They were timed and wanted to meet their growth goals.

Analysts don’t see booms coming

The idea that COVID-era dry bulk rates could rise to stratospheric levels of 2007-2008 in 2021-2022 remains a marginal theory. That said, no one had predicted the current windfall in container shipping. And archived analyst reports from 13-14 years ago reveal that no one predicted the previous dry bulk boom either.

Dry bulk inventories saw a massive increase, peaking in October 2007 and then again in May-June 2008, with many stocks tripling or more during the period. The “multi-sealers” of this era included Excel Maritime, Eagle Bulk (NASDAQ: EGLE), Diana Shipping (NYSE: DSX), Genco Shipping (NYSE: GNK) and Navios Holdings (NYSE: NM), among others.

DryShips founder George Economou (Photo: John Galayda / Marine Money)

The biggest stock winner was DryShips, on display at the spot. Its share price climbed to $ 131.34 on October 29, 2007, more than seven times its IPO price of $ 18 per share in 2005. On that day, the shareholding of founder George Economou was valued. to $ 1.7 billion (the equivalent of $ 2.2 billion today).

Analysts hadn’t predicted the stock surge. Dry bulk had already had four exceptionally strong consecutive years (2003-2006), and in 2007-2008, analysts reacted to market movements after the fact, recalibrating price targets and rate outlook accordingly.

In January 2007, Dahlman Rose had a 52-week price target of $ 35 on DryShips. Cantor Fitzgerald had a target of $ 10 per share for Navios Holdings, $ 19 for Excel Maritime and $ 21 for DryShips and Eagle Bulk. By the end of the year, those targets had turned out to be three to six times too low. By November, Cantor Fitzgerald’s price target for DryShips was significantly raised to $ 133 per share (Cantor Fitzgerald’s November 16, 2007, DryShips notes here).

In early 2007, Cantor Fitzgerald estimated DryShips annual earnings at $ 2.82 per share. In August, he had raised his estimate to $ 5.57. That same month, Dahlman Rose estimated DryShips annual profits at $ 6.71. DryShips actual profits for 2017 were $ 9.52.

Analysts had also not anticipated the disgrace of dry bulk amid the accelerating financial crisis. In early 2008, Cantor Fitzgerald and Dahlman Rose’s 52-week price targets on DryShips were over $ 100. The stock ended 2008 at around $ 10. It never recovered and was reduced over the next decade by dilutive offers before being delisted in 2019.

Another example: price targets at the start of 2008 for Eagle Bulk shares ranged from $ 18 (Citigroup) to $ 25 (Dahlman Rose), $ 36 (Cantor Fitzgerald) and $ 38 (Lazard). This stock was trading at $ 7 in December 2008. Eagle Bulk finally filed for bankruptcy, as did Genco and Excel. Eagle and Genco emerged from Chapter 11, Excel is gone (its fleet was sold to Star Bulk).

At the end of 2008, the prices of Capesize, Panamax, Supramax and Handysize were lower than they are today. Dry bulk inventories and rates are expected to decline over the next 12 years.

“It certainly took people by surprise,” Giveans said of the rise and fall in dry bulk in the mid-2000s. “The BDI almost doubled in six months in 2007. In 2008, it dropped. more than 90% between May and December. The rates have gone to bananas over a short period of time. When they move so quickly, it’s hard to be proactive.

Dry bulk inventory charts show the rise and fall (Chart source: Dahlman Rose Marine Transport Weekly: January 26, 2009)

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