Strange things have been happening to the Baltic Dry Index, the index covering dry bulk shipping rates and widely seen as a leading indicator of global economic growth. After rising to an all-time high of 11,039 last November, the index nearly halved to 5,615 in January, but has since recovered some lost ground, moving up to more than 8,600 last week. But it has started falling again since then and on 19 March, it was at 7,801.
The answer lies in commodity prices. Industrial commodity prices, too, have started moving up after falling for much of last year. And as commodity prices have risen, so have the freight rates for carrying those commodities.
The demand for commodities depends a lot on Chinese demand and that has so far held up pretty well. For instance, China’s imports of iron ore were up 33% year-on-year in February. But growth may cool off if the Chinese government tries to curb inflation.
More significant is the fact that bulk shipping rates are falling. That, says a Citigroup research report, is “a red flag for the Baltic Dry Index rally and raise questions about the industry’s confidence in its sustainability”. Citi analysts point out that the supply of ships is going to rise substantially in 2009 and 2010. Demand growth, on the other hand, is not likely to keep pace with the supply of ships, although the supply-demand balance this year is, according to the analysts, “debatable, but precarious”. The upshot: “The bullish argument for bulk shipping is that we’ll see massive ship delays out of China, while the bear arguments are that ship supply growth will still be at all-time highs in 2009–11 and/or commodities will lose their steam as we learn not to underestimate the impact of a slowing US on emerging markets and their seemingly decoupled commodity demand trends.”
The sudden fall in commodity prices over the last couple of days will add to the pressure on the index.
Orchid promoters’ wealth evaporates
Mukesh Ambani, the richest resident Indian based on his holdings in Reliance Industries, recently suggested that such notional wealth is deceptive in nature. Kailasam Raghavendra Rao, promoter of Orchid Chemicals and Pharmaceuticals Ltd, would probably be willing to stand and testify to that. Last week, the notional wealth of Orchid’s promoter group stood at Rs323 crore. This has fallen by 63% to Rs121 crore in just three trading sessions.
Here’s why: About a year ago, Orchid’s promoters raised their stake in the firm using borrowed funds, by pledging a large number of shares as collateral. The shares were purchased at around Rs250 per share. This Monday, when Bear Sterns Companies Inc. executed a distress sale of a number of its Indian equity assets (Orchid being one of them), the company’s share price fell sharply. This, in turn, led to margin calls from the lenders, who eventually sold 5.18 million shares at about Rs132 per share to recover their funds, about half the price at which the shares were purchased. While the promoter group’s loans have been paid back, their stake in the firm has now fallen to less than where they started out last year. What’s more, the whole incident has left a bad taste in the market, which has led to a drop in the company’s valuations.
At current levels, Orchid trades at just about six times its trailing earnings and it also has a huge $175 million (Rs709 crore) foreign currency convertible bond issue outstanding. Since the conversion price for the bonds (which mature in 2012) is about 200% higher than the current levels, there’s a high likelihood that these bonds would end up as debt on the company’s books. The only positive perhaps is that the company is available cheap and with the promoters being cash strapped, there could be a bid for it. But the fact that Orchid hasn’t rebounded from its lows, even after the Bear Sterns and promoter selling abated, shows that the markets aren’t yet betting on that.
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