Dry bulk equities (aggregate seven stocks under our coverage) posted 21% negative returns during the full year 2020. However, since the beginning of 2021, these stocks have registered a gain of 15.7% so far (as of 12 January 2021). Going forward, the stocks are expected to consolidate because the post-COVID-19 economic recovery in China has boosted the prices of many commodities from their lows in 2Q20.
One of the biggest drivers of this recovery has been rally in iron ore prices on the back of the Chinese stimulus package, which weighted heavily on the manufacturing sector. Iron ore futures have been popular among some investors as a proxy for directional bets on the Chinese recovery, which led to growth in prices. This along with several issues tightened the physical supply of the metal.
However, the recent surge of 11% in the Baltic Dry Index on 8 January 2021 is attributed to coal as much as to iron ore. Cold weather in China has boosted demand for power across Chinese grids, in turn, increasing demand for coal.
Talking about the futures market, iron ore can be represented by the iron ore fines 62% Fe CFR Futures traded on the Singapore commodity exchange, and coal can be represented by the Rotterdam coal futures. Both have been faring better than they were a year ago. Iron ore gained consistently throughout the year before skyrocketing in November and December. Meanwhile, coal futures had a rocky year, gaining ground only recently.
What does this mean for dry bulk equities?
The post-pandemic recovery in demand for commodities makes the asset class attractive to many investors. The size of the fiscal and monetary measures that are being put in place to help the economies to recover will see a dramatic rise in government debt levels, and we can expect an increase in inflation rates. As the demand for goods and services improves, the price of goods and services will also rise, thereby increasing prices of the commodities used to produce those goods and services. The dual tailwinds of likely stimulus by respective governments and inflationary pressures may push the demand for dry bulk commodities and the dry bulk stock prices.
We provide a correlation among miners, shippers and ore prices as all three are driven by demand for the commodity. The charts depict the trend of iron ore and coal prices against four key miners – Rio Tinto (RIO), Vale (VALE), Glencore (GLNCY) and BHP Billiton (BHP)- and three large vessel operators with a cape-dominated fleet: Star Bulk (SBLK), Golden Ocean (GOGL) and Diana Shipping (DSX).
The correlation numbers provide a strong insight into how stock prices behave in comparison with each other and commodity prices. Despite the same driving force, various operators show a different but consistent trend. In essence, dry bulk operators are expected to have a decent 1Q21, as the economic stimulus from respective governments will push the demand for commodities. Moreover, the subsiding of the pandemic, better supply-demand owing to low order book could lead to a surge in rates and stock prices.
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