Shipping stocks have been on an upsurge since the beginning of the year.

For one, this rally is not localized. It’s part of a worldwide wave. Eight out of 10 shipping company stocks among the 150 covered by Bloomberg have had double-digit gains since January. So the main reason for this trend seems to be an improvement in freight rates.

After falling sharply in December and January (down 63%), the Baltic Dry Index, which tracks transport rates, started recovering from mid-February. From a low of 647 on 3 February, the index gained 44% to 934 at the beginning of this month. Very large crude carrier (VLCC) rates gained 67% in March, Bloomberg reported, quoting Clarkson Plc, the world’s largest shipbroker.

However, that, too, raises questions. While tanker rates are up, given the ruckus over Iran leading to countries stockpiling on oil, what is driving up bulk rates? It’s not as if the demand for commodities is on fire. That’s especially so with China, the world’s largest consumer of many a raw material, aiming for a slowdown in growth to 7.5% this fiscal. Add to this the fact that the shipping industry is suffering from excess capacity across categories and the rise in freight rates looks unsustainable. Moreover, despite this improvement, freight rates are still very cheap by historical standards and do not cover operating costs fully.

The time charter yield (average daily revenue performance) of a typical ship is at $2,000-8,000 (Rs 1-4 lakh) per day, says a report from Antique Stock Broking Ltd. With the cash cost of running a heavy vessel staying at $24,000-28,000 per day, shipping rates have substantial catching up to do.

Chetan Kapoor, analyst at IDBI Capital Market Services Ltd, says, “The recent improvement in freight rates might look substantial on an absolute basis, but they are still not feasible for the shipping companies. Unless and until shipping rates reach $23,000 a day for large vessels such as VLCCs, shipping firms won’t be able to make any meaningful returns."

Also See | Changing perceptions (PDF)