[vc_row][vc_column][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]After a long break, Baltic Dry Index, which tracks global shipping rates, has once again started to move. It had corrected almost 95 percent from the levels of 12,000 in May 2008. Till the middle of last year, it was hovering around 630 levels. The upward movement started this year and the Index is currently at 1200 levels. There are reasons to be optimistic about global trade. The International Monetary Fund’s recent data suggests that the world economy could grow by 3.5 percent this year and 3.5 percent next year as against 3.1 percent in 2016. IMF also estimates a global trade volume growth of 3.8 percent this year and 3.9 percent in 2019, which is much higher than the 2.2 percent growth in 2016. China, which contributes to almost 40 percent of the world’s sea-borne trade, has seen 7.6 percent growth in its industrial activities in March 2017 against a low of 6 percent in December last year. Industrial activities in the US grew by 1.5 percent in March 2017 against a decline of 0.4 percent in November 2016. Similarly, Europe has recovered in the recent past to report growth of 1.2 percent in February, while Japan reported 4.6 percent growth in industrial activities in February as against negative growth last year.
Benefits of Operating Leverage
Interestingly, shipping industry data also shows encouraging trends. Global shipping utilisation rate in the dry bulk segment had dipped to 69 percent in June 2016 as against a high of 73 percent in 2013 and close of 95 percent in 2008. However, this has recovered currently to around 73 percent. This is encouraging, from the perspective of pricing as well as higher utilisation leading to benefits of higher operating leverage and hence higher profits. To put it in perspective, among the top three listed shipping companies, Mercator and Shipping Corporation of India (SCI) reported profits in December quarter as against a loss in September quarter.
Great Eastern Shipping (GE Shipping) did not incur losses earlier and reported decent growth in profits. It is important to remember that today the Baltic Dry Index at 1200 is trading 28 percent higher than the average level of 940 seen in the December 2016 quarter. Considering that shipping is a capital-intensive business, the players like GE Shipping and Shreyas Shipping, who have a debt-to-equity of less than one time and interest coverage ratio of over 4-11 times (see table) are the most deserving players who could actually be rewarded in this global shipping upcycle.[/vc_column_text][/vc_column][/vc_row]
