Last week's dry bulk vessel costs - as measured by the London-based Baltic Dry Index - hit an all-time high of 7,702, virtually doubling in the past 12 months. That pushes the cost of a Panamax vessel to almost $60,000 per day, a record high, forcing some countries to import cereals in containers designed to carry other goods like electronics and clothes. Shipbrokers estimate that, on average, a dry bulk shipment costs $50 to $70 per ton of cereal, while the same cargo in a container costs $35 to $40 per ton. It takes as many as 3,500 containers to replace a single Panamax (a medium-sized dry bulk carrier), but the price savings outweighs the challenge of managing thousands of containers filled with grains - normally stored in the hold of one ship.
Several countries, such as India, South Korea, China and Taiwan, are faced with rising food prices so they are willing to use the cheaper container ships. For example, the State Trading Corporation of India, the government company in charge of international bulk trading, recently told cereal suppliers that it was ready to import by container. Asian countries, which export textiles and electronic goods, might obtain containers at discount rates, as many of the vessels return empty from Australian, Canadian and the U.S. ports. The Australian government estimated that about 40% of the containers leaving Sydney and Melbourne to Asian ports are empty, a wasting asset that can now be used profitably by filling them with agricultural commodities.
The International Grain Council recently said that several important grain routes, notably from the U.S. to Asia, doubled their transit volume in the past year, contributing to rising dry bulk carrier freight costs. Asian countries traditionally rely on Australian grain, but the severe drought there forced them to turn to the U.S. This is one cause of the dramatic rise in U.S. exports.
The other factor that is keeping rates for dry good shipping high is China's reliance on coal-fired power plants, which provide approximately 70% of the electricity in China. Although China used to be a coal exporter, its soaring domestic demand has caused China to become a net importer, which has put even more pressure on dry bulk shipping rates. This has particularly benefited Excel Maritime Carriers Ltd. (EXM), which is one of my favorite shipping stocks in my Global Growth service. EXM was up 9% last week. Additionally, India and the Philippines have put export taxes on their coal reserves to save for their own domestic demands, so China is now forced to import coal from farther away - from South and North America. This is much more expensive and drives day rates even higher for companies like Excel Maritime Carriers.
The U.S. is the "Saudi Arabia of coal," but due to increasingly strict environmental rules in the U.S., more coal will continue to be exported. Since coal prices in the U.S. are erratic, due to uncertain domestic demand, the best way to profit from booming coal exports is to buy companies like Excel Maritime Carriers that specialize in shipping coal to China. Incidentally, Excel Maritime bought two new supramax vessels in July to boost its fleet to 18 ships, in part to meet China's growing demand for coal.
