Shipping Stocks Rally On Increased Output

It is no secret the shipping industry was hit hard by the financial meltdown a few years ago. All but seven of the big 30 shipping companies lost money in 2012. That said, it may be worthwhile to look at the companies that came out the other side turning a profit once again.

The Baltic Dry Index (BDI) , a measure of commodity shipping costs, has declined 53 percent in 2014. That may sound terrible considering the move higher in equities, but the last few weeks have been promising. Since hitting a low on July 22 the index has risen by 47 percent.

Because the BDI tracks shipping costs for dry bulk commodities, it is typically a good gauge for the health of the global economy.

Commodities such as coal, grains, and iron ore are the most heavily shipped goods. As the rates the shipping companies are able to charge increase, it should lead to a higher top line that eventually will flow through to better earnings.

More Ore To Ship

The recent increase in the BDI could be a result of a boost in the production of iron ore during the second half of this year.

The three largest iron ore companies have mentioned in their reports that they will boost production during the final six months of the year. Moreover, Brazil has stated that it plans to double the output of iron ore output over the next five years.

The market for this increased production will largely be in China and other Asian countries that will have to receive the commodity via tankers.

With emerging markets around the world planning to rapidly increase raw material output, shipping companies could take a number of their ships off long-term contracts and put them into more lucrative but volatile day rates.

Guggenheim Shipping ETF (NYSE:SEA)

SEA is a good way to break into the industry and gain exposure to 25 of the largest publicly traded companies in the sector.

SEA has had a solid chart since the shipping industry bottomed out a couple years ago. Year to date the ETF is up 27 percent, easily outpacing the broader indices around the globe. This is on top of a 37 percent increase in 2013 and 12 percent gain in 2012. The 44 percent crash in 2011, however, still has investors hesitant when it comes to the economically sensitive sector.

The big gains this year have SEA trading near a three-year high and a close above $23.26 would be a major breakout. That being said, the ETF has only had one losing session in the last 10, and a normal pullback/consolidation may be on the horizon. There is also support at $22.25 that could prove to be a solid buying opportunity on any weakness.