BDI will likely reverse on lower iron ore imports and easing port congestion

China's iron ore imports have been rising sharply in the last 3 months (Apr 09: +33% yoy to 57mt) despite its sluggish crude steel production growth (Apr 09: -2.8% to 43mt). This was mainly because traders were stockpiling iron ore in anticipation that prices would rise, according to the China Iron and Steel Association (CISA). This has led to a near record high iron inventory of 70mt, resulting in many ore carriers congested at the Chinese ports. Figure 3 shows rising Capesize tonnage waiting at Chinese ports.

The Baltic Dry Index (BDI) has risen 250% ytd to 2,707 from a extremely depressed level due to 3 reasons a) some easing in trade financing, b) high iron ore cargo shipments in the past 3 months, and c) the port congestion in turn soaks up more vessel capacity, boosting spot freight rates.We expect China's iron ore imports to ease, which in turn will ease port congestion. This will have a double-whammy impact on spot freight rates.

The BDI breakeven level for most dry bulk shipping companies is about 2500. At the current BDI level of 2,707, the profit level remains low for most companies. They will likely make losses in spot trades when the BDI reverses. The China's Ministry of Industry and Information Technology has issued a circular to authorities to control the number of steel traders and to crackdown on stockpiling.

We believe the current rally in BDI is not sustainable and will likely come off. We recommend selling dry bulk shipping stocks into strength. They have had a good run in the current stock market and BDI rallies. We remain UNDERWEIGHT on the dry bulk shipping sector in view of alarge influx of newbuilds into the market from 2H09 onwards.

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