Dry Bulk Shipping - On the doorstep of a correction?

The substantial rise in the Baltic Dry Index over the past six months, despite global weakness in steel production and electricity demand, has been driven single-handedly by Chinese buying of iron ore and coal, as the freight-inclusive cost of iron ore and coal imports fell below domestic alternatives from the start of 2009. However, the tsunami of imports may be coming to an end. Adding the rise in the fob prices of commodities and the more expensive freight, the cfr prices of imports have now closed the gap with domestic Chinese prices. Furthermore, we expect sequential capacity growth of some 10.2% in 2H, against just 3.1% growth in 1H. These factors could cause the average BDI for 2H09 to be lower than in 1H09. Therefore, we remain UNDERWEIGHT on dry bulk shipping and continue to recommend UNDERPERFORMs throughout our universe. We also downgrade Pacific Basin from Neutral to Underperform.

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