Why shipping stocks are running full steam ahead (and why it matters)

There are probably many advisers and clients who, late at night, gently doze off while listening to the shipping forecasts on BBC Radio as the announcer softly runs through Viking, North Utsire, South Utsire, Forties and the 31 sea areas that define the waters around the British Isles.

But the news that the broadcast imparts is potentially life-saving and, looking at it through the narrow prism of investment and financial markets, shipping is anything but boring right now.

“Given all of the concern around tariffs, trade and a global slowdown, it would be reasonable of investors to expect the shipping industry to be in turmoil. Yet the Baltic Dry index stands at a five-year high.”


Given all of the concern around tariffs, trade and a global slowdown, it would be reasonable of investors to expect the shipping industry to be in turmoil.

Yet the Baltic Dry index stands at a five-year high. The benchmark measures the cost of shipping commodities such as coal, steel, metallic ores and grains across three classes of vessel on 20 different shipping routes, which link Asia, Latin America, Africa, Australasia and Europe. This advance is pulling shipping stocks along its wake, using the US-quoted Breakwave Dry Bulk Shipping Exchange-Traded Fund (BDRY:NYSE) as an industry proxy.

Baltic Dry index and shipping stocks are rising sharply

Source: Refinitiv data

This has wider implications beyond shipping stocks. Given the nature of the goods involved, and the inability of financial markets and traders to influence it at all, the Baltic Dry index can been seen as fair proxy for global economic activity. The benchmark looks to have a fairly close relationship with commodity prices, for example, which makes sense, given that dry bulk ships carry these raw materials around the globe.

Baltic Dry index and commodity prices have in the past closely followed each other

Source: Refinitiv data

And while the past is no guarantee for the future, the experiences of the last 25 years suggest that the health of the Baltic Dry index can therefore provide some steer on the fate of global stock markets, which are ultimately also sensitive to global economic activity – although the shipping cycle can also march to its own beat, judging by the gloom which has enveloped it for much of this decade.

Baltic Dry index can be seen as a pointer for global equities

Source: Refinitiv data

Scrubbing up


“There are three possible explanations as to why the Baltic Dry index is sailing higher when financial markets are becoming concerned about ever-more mixed economic data from the West.”


There are three possible explanations as to why the Baltic Dry index is sailing higher when financial markets are becoming concerned about ever-more mixed economic data from the West.

  • The first is that the global economy could be doing better than many think. This contradicts the softness seen in many indicators, and weak trade flow data, but it must not be dismissed out of hand.

  • The second is that an acceleration in Brazilian iron ore exports (which were hit by a terrible accident in January at Vale’s Brucutu mine) is stoking fresh demand for dry bulk carriers. But this does not account for how the rates for Very Large Crude Carriers (VLCCs) and container shipping rates look to be firming, too:
  • Other types of ships are also seeing firmer rates, including oil tankers

    Source: Refinitiv data

  • The third is that a wider shipping trend is at work and – scanning the industry press – the biggest one seems to be the imposition from 1 January 2020 of tougher emission rules by the International Maritime Organisation (IMO), whereby all ships must use fuel that has less than 0.5% sulphur (rather than 3.5% now) or fit exhaust gas cleaning systems (‘scrubbers’). Fitting scrubbers will take time and temporarily remove fleet capacity while, in the longer term, the higher-cost low-sulphur fuel could make it uneconomic to run older vessels that have not been retrofitted and persuade owners to scrap them, permanently reducing capacity – or so the theory goes.

  • The problem here is that the scrubbers will make the ships heavier, so they consume more fuel, and they can mean that the sulphur simply ends up the sea, in waste water, rather than the air. Singapore, California and Belgium are already insisting on the use of cleaner fuel rather than scrubbers and this may help to explain why the share prices of leading exhaust gas system suppliers are sliding and not soaring, despite the apparent retrofit bonanza that lies ahead.

    Waving or drowning?

    “One further test is to see what the real shipping industry shrewdies are doing, namely the owners.”


    One further test is to see what the real shipping industry shrewdies are doing, namely the owners. Intriguingly, the year began with a rash of share buybacks from US-listed firms such as Golden Ocean, Diana Shipping and Star Bulk, at a discount to net asset value, while in August, Norway’s crude oil tanker industry heavy-hitter John Fredriksen sanctioned the purchase by his US-listed Frontline shipping firm of 10 vessels from commodities trader Trafigura for $675 million.

    Advisers and clients will not have the time to follow such stock-specific details but they do suggest that ship-owners think their stocks are cheap and better times lie ahead.

    Only time will tell. But if their share prices start sinking again, then the global economy could indeed be in trouble. By the same token, the IMO 2020 rules might just mean the owners of young, well-equipped fleets could be primed to clean up as older, dirtier vessels are put out of business, especially if the economy holds up better than expected.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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