Shipping stocks gain on rise in Chinese demand, upmove in Baltic index

But analysts say rise unlikely to sustain

Shipping company stocks have been moving up in the last one-month period due to increased activity in the bulk dry trade category. Stock of companies like Shipping Corporation of India, Great Eastern Shipping, Essar Shipping and Mercator have risen by an average of 28% in anticipation of a possible pick-up in trade as Chinese demand for iron-ore is seen rising.

The Baltic Dry Index, which tracks the movement of freight in the non-oil trade, has been on an upward trend, an indication of pick-up in trade.

“Stock prices have been rising on the back of a rise in the Baltic Dry Index. Dry bulk trade has been moving up primarily due to China stocking up on metals and iron-ore sourced largely from Australia and Brazil,” said Dipen Shah, senior vice president – research at Kotak Securities.

This spurt in demand had also helped push up global shipping freight rates, said analysts.

Stocks of shipping companies had seen sharp falls since the beginning of this year till September due to a drop in trade-related activities. Post the rise in the Baltic Dry Index in September, the stock prices of these companies also started moving up. Till September, the share price of Mumbai-based Mercator had been down 49% but gained 38% after the rise in the index.

Similarly, stock like Essar Shipping and Shipping Corporation of India were down 50 and 82% respectively, only to rise 36 and 23% post-September. Great eastern Shipping, on the other hand, saw a modest fall of about 4% but gained 12.4%.

However, some sections of the market believe that even with a continued rise in Chinese trade activity, Indian companies would not immediately benefit because of their small-sized vessels.

"The dry bulk cargo demand at this point in time is for all the capesize ships. Due to this, Indian shipping companies are not really benefitting as most have smaller-sized ships like Panamax, Supramax and Handymax," an official from the Shipping Corporation of India told Business Standard.

Capesize vessels are typically above 150,000 long tonne deadweight (DWT) transporting coal, ore, and other commodity raw materials.

Analysts said that Indian shipping companies would benefit only if the dry bulk demand continues to remain strong in the coming months.

"The US has about 40 million tonne of grains that are to be exported mainly to Europe and West Asia," said the industry official of the leading shipping company. "Since grains are a perishable cargo, it is economical to send the commodity in Panamax and Supramax. Due to this, demand for Indian small size ships should pick up in the coming months," he said.

Analysts, are therefore, wary about investments into this sector at this point. They believe that the performance of the shipping stocks would continue as long as the Baltic Dry Index is on the rise. But it could come to an end once Chinese re-stocking is over.

“China stocking-up is typically a phenomenon that follows a pick-up in economic activity and is cyclical in nature. However, we need to wait and see how long the demand from China this time continues,” said Shah.