Due to an oversupply of vessels and slowing economic activity, the Baltic Dry Index fell to a 28-year low of 608 on Friday with the shipping industry facing tough times ahead.
The 2000s explosion in demand caused an oversupply of vessels. This naturally pushes freight rates lower, as I have mentioned in previous blogs.
Low freight rates and a stronger dollar provide support to commodity producers but for the shipping industry these are bad news. Companies with longer-term contracts may sustain the shock from a plunge in freight rates but those that rely on spot rates may soon be forced to send ships for recycling. When the supply of ships drops to equilibrium levels due to a process called “scrapping”, the market will recover. The shipping market is much more complex than it appears to be and hides many risks for retail stock investors. Those who do not understand this complex market may be better off staying away from it.
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Disclosure: no relevant positions.
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