Dry bulk shipping stocks are not good proxies to China's rising commodity demand

It's true that investors' first reaction is to treat dry bulk shipping stocks as commodity plays. While share prices have risen, freight rates are still in doldrums. We have just experienced the first market rally from a recession trough. In such a rally, investors don't dwell deep into fundamentals. They just buy stocks that are sold down a lot, in anticipation of rising demand and completely ignore the supply problem.

I expect over the next 2 quarters, investors will start to differentiate the real recovery stocks from those that will be in doldrums for a while. The shipping stocks belong to the latter category. As quarterly results continue to pose losses, investors will wake up to the fact that there's no quick fix to the oversupply problem. I expect rising vessel deliveries in the next few quarters. Current Capesize orderbook stands at 105% of global Capesize fleet. Total dry bulk orderbook is 71% of global overall fleet. Vessel cancellations/delays can't fix 2009's problem, but might fix 2010's problem. That said, I think the dry bulk shipping market would likely face oversupply for 2 years in view of weak global economic growth (i.e. a U-shaped recovery).

This time round, the problem in the shipping market is supply, not demand. The current situation should not be equated to the inflexion points of the dry bulk shipping market over the last 5 years. Despite rising number of Capesize vessel fixtures (i.e. rising vessel demand in anticipation of rising iron ore cargoes) since Nov 08, freight rates (proxied by the BDI) are still in doldrums (see below chart). This time round, it is not just about the return of demand. The litmus test of a shipping recovery is about overcoming oversupply.

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