Dry Bulk Shipping: Recent BDI Rise Is Heartening

Just look at the chart below to see how much healthier the Dry Bulk Index is looking by the day.

Baltic Dry Index

The Capesize index now stands at 15235.

The chart below compares the Baltic Dry Index (red), the Baltic Capesize Index (green), the DryShips (DRYS) stock performance chart, and the S&P500 performance chart for the last 3 months.

Clearly DRYS stock bottomed (purple line) at the same time Baltic Capesize Index bottomed (green line). It has been rising ever since. The Chinese are the main reason for this. They use a lot of Capesize ships because they import huge quantities of materials. They were holding off importing iron ore (and coal as a consequence) at the end of last year. This was partially due to the recession, and it was partially due to the fact that they had year long price agreements for iron ore in place at higher prices than they wanted to pay.

With the advent of the new year, the Chinese have started importing more. They have to in order to make their stimulus package work. The amount of shipping is still below the highs of last year, but it is clearly rising. The Chinese are starting to buy more now because their supplies are so low, although the new price agreements are not yet in place. The Chinese are trying to negotiate for an iron ore price, which is generally expected to be about 40% lower this year. They are trying to negotiate it retroactive to Jan. 1, 2009. This would make all of the iron ore they are buying now cheaper. I cannot say whether they will succeed. However, it seems likely that they will want to conclude the negotiations quickly so that they can be sure of their actual costs for iron ore this year.

The shipping is ramping up. The stimulus package, which is infrastructure heavy, should cause them to import at least as much as they did last year (perhaps more). There may not be as much iron ore. However, the steel they will need for many of their infrastructure projects should compensate to some degree for the steel they will not need for the depressed steel industry market. Metallurgical coal is linked to iron ore, and fuel coal is increasing in use in China for electricity and “coal to diesel” plants.

The stimulus package will likely cause the Chinese to import more than normal amounts of copper ore (for wiring and copper piping), bauxite (aluminum), concrete, cement, wallboard (not sure if this is a dry bulk item), lumber/timber, etc.

I am sure I have left out other important Dry Bulk items, but you get the idea. This should overall be a boon to the Dry Bulk Industry. They tend to use the biggest ships, so the capesize carriers should benefit the most. However, the Panamax carriers will either be dragged up eventually or the availability of Panamaxes for cheaper rates will start to hold the Baltic Capesize Index down.

The Capesize index has rebounded from a low of about $2000/day to its current price of $15,235 today. The Chinese were definitely a huge factor in this. They imported 32.5 million tons of iron ore in Nov. 2008. Then they imported 34.5 million tons in Dec. 2008. Apparently some of this ore came from far away Brazil, which partially accounts for the increase in demand in shipping. It seems likely the demand will increase further as more material is imported once the price agreements are in place. Also the other dry bulk items mentioned above will likely come soon after the iron ore.

Since a lot of companies have long term charters, you might wonder why the rise in the BDI is important? As an answer, one might conjecture that the importers, such as China, would try very hard to renegotiate long term charter agreements if the spot prices stay low for a prolonged period of time. Even for those companies with long term charters, the rise in the BDI and BCI are very good news. For those companies with unchartered ships, the rise is even better news, especially when accompanied by an increase in shipping demand.

I expect that the Baltic Cape Index will continue to rise in the short term. I expect the other indices, especially the Panamax Index will begin to follow it more closely soon. This should be a true boon to the shipping industry. Companies that are heavily leveraged will be the most relieved, since they will be the ones most worried about surviving the recession. These companies such as DRYS and EXM, which also have the best Price to Book value ratios (i.e. are arguably the best value plays and actually growth plays), should benefit most in stock price form the increases in the BDI and its sub indices.

I believe the China infrastructure heavy stimulus package, plus the still excellent growth in China (about 8%, but some say falling to 6%), should lead to another overall increase in China’s Dry Bulk shipping this year (even taking into account the downturn in the worldwide steel industry). When the iron ore agreements are finally signed, we should see a surge in shipping, which may surge again later with the addition of building materials items (or raw materials for them). In addition China is apparently planning to add to their stimulus efforts in the March time frame. This should help further.

Good luck in the markets. They are a challenge these days.

Comments

[Mai:]

Hi David: do you know why TBSI is performing better than all other shippers? It does not even issue dividends. It is certainly frustrating that EXM has better future earnings potential, its dividend date is coming soon, but it still has been lagging DRYS and TBSI, and other shippers. I wish I knew why.

Jan 14 10:03 AM

[David White:]

Mai: EXM has some debt issues. That is likely why it is lagging. DRYS may resolve some of theirs by spinning off their deep sea drillers. Also DRYS is being touted by Cramer. I think the Fast Money guys like it also. DRYS has been a leader for a while, etc.

As for TBSI, it is less leveraged than EXM. It has also broken through its resistance point on its trip up (from a charting perspective). This means it will tend to go upward when it gets a chance. This will continue until it reaches its next resistance level. If the BDI rise curtails for some reason, that could stop it. If the markets keep falling that could also stop it. Sometimes the market acts out of sentiment or emotion. The charts sometimes show what that effect is going to be better than other things.

EXM is puting in its pennant formation. It has yet to take off to the high side appreciably above its resistance level. When it breaks out, it should go considerably higher. It is not as much of a market leader as DRYS.

Jan 14 10:20 AM

[David White:]

The BDI is up again today, even on a bad day. The Baltic Capesize Index is up demostrably by $449 to $15684. The thoughts about China importing more in the near future are sseming to ring very true, especially when everything is down today. Naturally the shippers are down in a hugely down market. However, the future is still looking brighter for them as the BDI continues to rise.

Jan 14 10:27 AM

[David White:]

Mai: Take heart from the fact that EXM is down much less than TBSI today ($1.57 to $.42 at this point today). The pennant formation still looks to be relatively intact. However, if the market continues downward much further, its energy build up may be desroyed to some extent by its inevitable slide to the downside. Any particular stock performance is always based to some degree on the overall market performance. The market seems to be in full retreat today.

Jan 14 10:40 AM

[Mai:]

David: Thank you very much for your answers!!!

Jan 14 11:09 AM

[Jeff G.:]

Hi David,
Thank you so much for putting the effort into this insightful article. I am trying to learn as much as I can about the shipping industry after getting torched on DRYS and EXM during the plunge.
Could you please tell me where you get your information on what and how much the Chinese are buying? This would help tremendously in planning out my investments.
Thank you,
jeff

Jan 14 12:03 PM

[David White:]

Mai: Apparently the market went down today in response to the retail sales data from December (and full year). The retail sales actually went down for the full year for the first time in a long time. This really shouldn't have come as a big surprise to anyone who has been following retail for the last two months (or even to shoppers for that matter). That being said, the market may have put in a temporary bottom. This bottom may last this week at least. It hit $83.16 on the SPY. This is a former area of support. It has so far rebounded to $84.40. Let us hope we get a good rebound from here. If so, you will likely see EXM shoot up as it finishes the pennant. Retail sales don't have a direct connection to dry bulk. A good part of China's dry bulk this year will be stimulus package related. That is not going to go away. I am still looking for the BDI to keep rising. It should eventually take the good shippers with it. The more highly leveraed ones like EXM and DRYS should benefit the most from this.

On the other hand we may be going down to a deeper bottom than we have seen to date. It is really hard to determine exactly what the market will do. Some news has been discounted. However, news is generally bad. One of the few bright spots has been the rise of the BDI. That should really make more people want to get into dry bulk shipping stocks, as they may be a bright spot in a gloomy market. The valuations seem low, so hope for the best. I still think EXM and DRYS are two of the best. I like TBSI, but it does not have the big ships (Capesize or even Panamax) that China will most likely want to employ to move their dry bulk goods. I don't think it will participate as heavily in this China led upsurge. It does have a lot of Tweendecker ships. It is possible that it could fill a niche. However, I am looking for companies such as DRYS and EXM to benefit.

As I said above one of the main ways they may benefit is that the rise of the BDI should take pressure off the shippers to renegotiate long term contracts downward. Also it should evetually provide some spot price charters at more reasonable rates for those companies that are not fully booked. Both EXM and DRYS tend not to be fully booked. Therefore they should both be big beneficiaries of the rise in the BDI led by China. They also both have bigger ships, which should interest the Chinese.

The worries for tomorrow are:
INTC -- they have already pre-announced big problems
JPM -- banking is in trouble. It's likely bad news.
PKX -- even though they got the Toyota deal recently they still have problems. A bad result from a major steel producer may have a negative effect on shipping.

Jan 14 12:17 PM

[Bartx:]

Hi David,
I bought DRYS and Genco at much higher levels. So, I am certainly at a loss here. My main fear however are the rumors that these companies may be taken private by their owners (the CEO's)... destroying shareholder value. What is your take on this?

Jan 14 12:46 PM

[Stanislav O...:]

The only commodity that is really important for drybulk shipping, at least as far as Chinese import and capesize market are concerned, is iron ore.

Last year China imported only about 6 million tonnes of coking coal and about 36 million of power coal. It compares with more than 410 million tonnes of iron ore imports.

The amount of other commodities in dry bulk shipping routes to China is marginal.

What really important for shipping rates is supply vs. demand picture. This issue was not address in the article.

There was really significant activity in chartering ships to haul iron ore to China in the last several weeks. Over 150 spot capesize vessels are heading to China at the moment. It compares with virtually zero activity in the spot market two months ago and may easily lead to oversupply of iron ore in Chinese ports again by spring.

But even such frantic chartering activity could not significantly rise spot capsize rates above OPEX level. Current spot level of $15,684 looks decent (though it only a fraction of the rate required by overleveraged US listed bulkers like GNK, EXM, DRYS, which bought a lot of their levels at huge bubble prices, to stay afloat).
However, not a lot of currently idle capesize vessels are able to get this kind of rate at the moment. BCI index is actually determined by rates on several shipping routes. In Europe, where it is hard to find an available capesize vessel, it is possible to charter a ship for $24,096 a day in the moment. But in the Pacific, where most of the trade is actually concentrated (on Australia to China route), the spot rate is only $6,036, still below OPEX level. This is the region where most of the idle vessels are located in the moment.

Jan 14 04:03 PM

[User 265729:]

When the Baltic Dry gets close to 3,000 (break even point) wake me up.

Jan 14 04:05 PM

[karma:]

while it's true that china has this huge stimulus package, expect the chinese mkt to freeze up for about 2 wks for chinese new year celebration starting 1/26. in fact, the freeze in eco. activities starts a few days before the celebration because workers pack up to visit family elsewhere. there's a whole ritual of visiting ancestral graves & celebrations with family & clan members. I don't expect things to move again till about a full week after the lunar new year celebration starts.

Jan 14 04:12 PM

[poor&unempl...:]

The Capesize index now stands at 15235??????????????


Another expert who has no clue about shipping or indexes!

Jan 14 07:10 PM

[David White:]

poor&unemployed: Its actually higher today. The figure today was $15684. I just read the charts.

Jan 14 09:40 PM

[David White:]

Karma: Thanks for the info. It is always good to know ahead of time what odd facts may adversely effect the stocks you are looking at.

Jan 14 09:41 PM

[David White:]

Stanislav Oleynikov: Thanks for the good information. According to the article I read the expectation is for the Chinese import rate of iron ore to go up beyond the December level. I believe the high point in 2008 was around 37 million tonnes per month. I am not sure exactly how high it is supposed to go. The information is apparently being supplied by the Chinese government. It is likely correct.

I am expecting other building materials to need to be imported at much higher levels than currently. My reasoning is that most building materials suppliers just don't have that much extra capacity. That means that a lot of building materials such as wood, concrete/cement, and copper will have to be imported. I expect the overall effect to be commensurate with the normal China shipping growth rate. After all the stimulus package is 5-10% of the GDP. It is mostly going to be spent on infrastructure. They do still have to do a lot of repairs as a result of last year's major earthquake. All the extra material has to come from somewhere. They can make their existing factories produce more, but they cannot create raw materials out of thin air. With all of this in mind, I still do expect the rates to rise further. How much further will likely be determined by overall world economic health. However, the Chinese are stuck with importing more. Their stimulus package will not work without the raw materials. That at least is good news for the shippers.

All that being said, CNBC is now saying the Christmas rally is officially over. This likely means all stocks will begin to be pressured to the downside again???? Fear is back??? Worries about banks are resurfacing. I am not sure betting anything to go up right now is a good bet. We've been going down dramatically for a week or more.

Jan 14 09:55 PM

[David White:]

User 327482: I haven't heard those rumors. However, they do make some sense. The average price for a 5 year old Capesize in mid 2008 was about $150M. Today it's below $50M. Those figures are likely to change dramatically when we come out of the current recession. I would expect that the ship values 2 years from now would at least be over $100M. Iron ore / steel prices will go back up once the recession ends. The NAV's are currently depressed, but the book values may be a better long term reflection of the shippers' worths. That means that some people might see this point in time as a great opportunity to buy up shippers at a huge discount. Shippers such as DRYS and EXM are trading for less than 30% of their book value. In a good economy, they might easily be trading at their book value or higher. The companies could be legitimately bought for a song using the NAV (Net Asset Value) arguement, which is based on the latest sales prices. Then they could be sold 2-3 years later at or above the book values. That would be a huge profit. Of course, there is always risk involved.

Jan 14 10:07 PM

[Paul Killinger:]

I believe Cramer and you guys are both correct about the future prospects for China. Since they don't believe in NIMBY, their cost advantage versus the U.S. simply grows and grows.

The best stimulus package we could come up with is to mimic the Chinese. Right now, however, we continue to head in the opposite direction. This antithesis to all known economic growth principles CANNOT work, of course.

We no longer live in the nation we grew up in, and our present economic malaise reflects that. Since we refuse to acknowledge the obvious, it will be years (or a generation perhaps) before we initiate our own recovery.

Jan 15 10:31 AM

[Paul Killinger:]

In fact, we're so stupid it's moronic. I think Josef Schumpeter said it best when he declared, "Profit is a penalty."

Jan 15 10:39 AM

[prop 77:]

Most of EXM's larger ships are booked at $22K/day + 50% extra of the upside spot rate. Looks to me like they are fixed up for year ahead and the dividend is sweet. I like the competitive side of the panamax's cost to the cape size, safer bet in my opinion.

Jan 15 10:59 AM

[David White:]

The market is down big again today. However, the JPM result was as good as could be expected. The spot Baltic Capesize index is down 298 to 15386. This was pretty much expected after the latest market behavior and news, especially CNBC saying the Santa Claus rally was over.

I don't believe there is much more news that we don't know about to come. Both DNA and INTC report after the market closes. INTC has already announced really bad news. The facts shouldn't be that surprising. DNA may diasppoint a little bit. It is really hard to say. I am not familiar enough with its day to day figures. PKX already reported bad news, especially for shippers. Certainly the worries about the banking industry are prevalent in the market today.

That being said, both DRYS and EXM are down strongly on the day. They might present a near term buying opportunity for short term traders, especially if you think the market may rebound at the end of this week sue to a lack of further new negative news in the short term. We are certainly at a support point. A minor up rally might be appropriate. The market has been going nearly straight down for the last 7 days. A small blip to the upside does seem appropriate. Perhaps you could glean some profits by buying at today's lower prices.

In the current market this is extremely risky. It is trending downward. However, short term profits are nice. I hope you make a profit if you decide to try this. It does sound like longer term the market is headed still further down (at least in the near term). However, even sharp downtrends have to take a break. Good Luck.

Jan 15 11:10 AM

[Mai:]

Hi David: Thank you again for your conscientious efforts to pass us your insights and all the information you found! You have excellent points about China’s infrastructure spending. Jim Cramer had been trashing China for years especially since he started his Mad Money show. I have the impression that he had hated China for his entire life, until two weeks ago when he changed his opinion for both China and dry bulk shippers. He bought FXI for his trust and has been cheer-leading for China. Cramer finally got it that Chinese government does not give away money and they only pay people for work. They invest in projects to modernize the country and not for ideology purposes. In my opinion, the market and dry bulk index corrections provide buy opportunities. But the chart of EXM might have damaged too badly today. Could it be repaired soon? Thank!

Jan 15 11:15 AM

[everyday in...:]

David, thanks for your insight into dry bulk shippers. I completely agree with the fundamentals of the trades in dry bulk shipping, especially with Chinas stimulus package heavily favoring infastructure spending. With the market moving lower the last few days, is the chart for EXM too damaged for any rally in the short term? If so, where do you see EXM and DRYS going over the next few weeks?

Jan 15 12:06 PM

[oldfolkdancer:]

I've enjoyed being a Diana Shipping Stockholder for a long time. The fleet is young, the customers are all top drawer: Cargill, BHP Billiton. The management is intelligent and show evidence of staying in touch with what is going on in other sectors. Communication with the the analysts and stockholders is excellent.

Thank you for the well written article - it strengthens my faith that good times will return

Jan 15 03:14 PM

[poor&unempl...:]

David

There are apples and there are oranges. INDEX AND RATES ARE DIFFERENT. Also, please remember BDI or BCI is not like SP-500 or DJ-30. Daily index is decided by few old men based on REPORTED FIXTURES and not actual contract values.

These are for today:

Baltic Exchange Dry Index 920 (UP 9)

Baltic Exchange Capesize Index 1888 (UP 24)

Daily Summary of the Baltic Exchange Time Charter Routes Rate ($/Day) Change

BCI

Average of the T/C routes $15684 (UP 449)



On Jan 14 09:40 PM David White wrote:

> poor&unemploye... Its actually higher today. The figure today
> was $15684. I just read the charts.

Jan 15 04:15 PM

[David White:]

poor&unemployed: I am not sure why you are trying to correct me with old data. I just gave the BCI spot rate (your T/C routes data) in my comment today. I may have called it slightly the wrong thing. However, anyone familiar with Dry Bulk would have known what I meant. Your figure for this is yesterday's. DRYS almost always posts the up to date information on their web site each day. There are other places to get it too. The Capesize spot rate was $15386 today (down from yesterday) as I stated before.

Your point about how the rate is decided is probably well taken. However, contract rates are often decided based partially upon those numbers. They are still important. They are still an indicator of how the market is doing. The big trend has clearly been to the upside lately. That is a good sign.

So far it looks like I made a good call on DRYS and EXM for the short term today. They were both down roughly $1.50 (DRYS a little more). They bounced back considerably. I expect the Capesize spot index to be up again tomorrow in response to the rebound in the market today. JPM's result was a big plus today. However, C reports early tomorrow, so that could destroy things if it is not good. Still the Baltic numbers will likely be out before then, so shipping may do all right in any case. We will have to wait to see what tomorrow brings.

If the C numbers are not too bad, I would expect the market to continue to creep up. The stimulus plan is clearly going forward. It is unlikely the Republicans will be able to block it. I am not even sure they really want to. It's just hard to tell what the result of the inauguration will be on the market. Obama should be able to push more for his stimulus plan and his other initiatives. However, I am not sure people think things are moving fast enough. Good luck with your investing.

For those of you who want a crystal ball projection, I can only say that the overriding trend in the market is down right now. I expect, if the C numbers are not to bad, the market will continue its upward push tomorrow. Then the inauguration happens. More banks report next week. We will likely see a reaction to those number in the market indices. I expect the banks numbers are generally bad. Other numbers are likely bad in general also. How bad will likely determine the market direction next week.

BAC reports on Tuesday. That will be a big one. It's news may really set the tone for everything else. Everyone knows C is a mess, so the market might not swing on that. If BAC reports bad news though, the market is likely to drop seriously. Good luck. I am struggling along with everyone else to make sense of everything. There are a lot of companies reporting next week. You will have to evaluate the overall picture quickly if you are trading short term. Next weeks reports will likely determine if the market stops at this resistance point or goes further down.

Jan 15 05:25 PM

[keithpiccir...:]

Thanks for the insight into these carriers.
I have traded DRYS and currently hold EXM and am a bit concerned about not holding one that goes bankrupt - hence have looked at SEA.
Today was an especially tradable day in the transports.

Jan 15 05:27 PM

[David White:]

To clarify a little further: We are again at oversold levels on the SPY. Charting theory dictates that the market will try to find a bottom when it reaches these levels. We found good support today. Barring catastrophic news from C tomorrow morning, I expect the support to hold up temporarily at least. Depending on the news next week, we may find that we have found a bottom. Alternatively the news may be so bad that it sends the markets to even further lows. I think we will have to wiat until next week to see that. Obama's and Congress's words will likely have some effect. Word is out that the 2nd tranche of the TARP funds has been approved by Congress. This may settle the immediate anxiety over Citi and BofA. In that sense tomorrow is looking better to me at the moment.

There are a lot of important companies reporting earnings next week. What they report and what their guidance is going forward is likely to determine whether this bounce was a near term bottom or not. For those of you who want to see the charting evidence, Phillip Davis's Options article has a good charting illustration of our current situation.

Jan 15 11:00 PM

[David White:]

keith: I do not actually believe EXM is in immediate danger of going under. That has perhaps been overblown. The Baltic Indices do seem to be rising. China with the additional weight of its stimulus package should provide impetus for a continued move upward. If you add the 5-8% estimated for China's growth this year to the several percent of GDP added by the Chinese stimulus package you get good growth in shipping. China is the major player, so that is good growth. If you figure that the "infrastructure heavy" stimulus provides more than a simple few percent to shipping, the picture gets rosier for shipping.

I think EXM should outperform the SEA ETF as long as serious financial problems are not encountered. If the market turns downward again next week, you might want to sell temporarily as the market is an indicator of economic health about 6 months out. Then too there is the Chinese New Year lull alluded to above that may be a two week drag on the Baltic Dry Indices soon. If the Baltic Dry Indices don't continue to rise after that, you might start to worry. If you see that EXM and other shippers are having to renegotiate their long term contracts much lower, you might consider getting out of highly leveraged shippers. I currently expect the Baltic Indices to rise demostrably from their current levels over the next 2-4 months. However, I can be wrong. No comment is a substitute for being aware of what is going on.

Jan 15 11:15 PM

[poor&unempl...:]

David,

When some of the biggest banks in the world have gone under and more are on the way, do you actually believe China is going to save the day?

First lesson in CAPITALISM - you need capital. Without capital, farms grow weeds instead of corn.

Box trade is at grassroot level in the shipping industry. They have people in every port in the world, who know the expected cargo volumes. Box trade indicates total demand destruction for finished goods, which in turn means no demand for raw materials. Dry bulk vessels carry raw materials (including grain). Movement of BDI over next few months would be similar to movement of Fannie Mae stock. It will not be meaningful.

About BDI - It is not a representation of market when there is no liquidity. When 10 vessels are sitting SPOT and one gets the cargo - it is not a market rate. Large charterers have large holdings of publically traded shipping companies.

Similar to homeowners - if you can not pay the bank - you are out.

Jan 15 11:45 PM

[David White:]

poor&unemployed: I tend to agree with your assessment of the meaningfulness of the BDI at the moment. However, you are missing some of the significance of it. It by itself is a barometer of the demand to a great degree. As it goes up, the demand is generally going up. The figures I cited from Nov. and Dec. about China trade show how it is following demand increases. It is also important in negotiations. If it is too low, people will say theres no demand, so they will want lower prices. If it stays low too long, people will want to renegotiate their higher priced long term contracts. I actually saw a note on DSX doing just this for one ship recently. For these reasons alone it is a very important indicator. Also importantly for shippers who are not fully booked, if it rises, it indicates that those shippers may soon get healthier (i.e. be able to book their ships at profitable rates).

As for demand, I have already explained in detail how I believe the China infrastructure stimulus should increase China Dry Bulk imports over the next two years. Your rhetoric is just that. I would appreciate some facts and figures, if you wish to seriously influence my or other people's opinions. You correcting me with yesterday's rate (when I wasn't wrong in my comment) does not instill me with confidence in your knowledge of the facts.

I have not tried to say the Dry Bulk sector will definitely move upward. I have tried to describe what I feel are the big risks. On the other hand, the biggest profits are usually made when you buy during the high risk periods. No doubt that is why Warren Buffet has committed a lot of his money to a variety of stocks lately.

The Dry Bulk carriers are not the same as container carriers. Container carriers are carrying finished goods mostly. Dry Bulk carriers generally carry raw materials.

I am saying a China led Dry Bulk surge is currently in play. Since they are planning a lot of infrastucture, this makes sense. However, it will not necessarily lead to China exporting a lot of goods via containers.

There has been further good news recently. The government and BofA have reached an agreement about the Merrill Lynch acquisition. BofA will get $20B more from TARP, and it will get guarnatees on losses on troubled assets up to $118B. This should relieve a lot of the stress the markets were feeling about the BofA news at reporting time next week. I am looking for the markets to rebound tomorrow.

While I concur with you that many banks are still troubled, the government has made significant progress in freeing up credit. Some of the shipping downturn at the end of 2008 was due to there being no one to replace Lehman as a loan provider, when Lehman went under. Apparently several other players have now stepped up. The situation has definitely improved.

The government is doing a lot to relieve the credit crisis in the US. I am expecting them to do still more. The US stimulus package will create a lot of jobs. That should stop the economy from shrinking further. That will allow shipping to recover. Bill Gross was saying that we might need mortgage rates to go to 3.5% to get to a real bottom in the housing crisis. The government is defintely pushing rates in that direction. They were under 5% this week. I don't know if Bill Gross's figure was exactly correct, but the government is defintely moving things in the right direction. People who scream the sky is falling all of the time without any facts or figures are not being particularly helpful. Yes, there are challenges. However, everything is not doom and gloom. And yes, China can have a big impact on Dry Bulk shipping, especially with a stimulus package which is infrastructure heavy.

Jan 16 02:06 AM

[David White:]

poor&unemployed: The infrastructure that China builds now may eventually lead to increased exports. However, we have been discussing more near term concerns, so I have not tried to deal with the more nebulous aspects of good infrastructure investment now.

Jan 16 02:18 AM

[David White:]

I was wrong about BAC reporting next Tuesday. It reported today. The biggest negative item was $15.31B in losses from Merrill Lynch. Since the stock market was really negative last year, this is not exactly surprising. The good news is that the new government agreement means that BAC is not in an immediate crisis. Merrill Lynch results should improve as the stock market improves over the course of the year. The total loss for Q4 for BAC was 1.79B, which isn't too bad considering the Merrill Lynch result. BAC also has the $20B in new capital and the $118B guarantees against losses on troubled assets. It is seemingly far ahead at this point.

C also reported this morning. It reported an $8.29B loss for Q4. Still this was not completely unexpected. That is why it got $40B+ from the government last year. Plus it got $301B in trouble funds guarantees (a loss sharing program).They announced the definitive agreement on exactly how this would work today. Again C should do better as the economy improves. It announced it was splitting into two operating units in order to enhance its performance. It also said it expected to gain $6.4B from the joint venture with MS with Smith Barney (a part of C) as the core of the joint venture.

So far the markets are still up dramatically, I am hoping for the best. I think the street knew how troubled both C and BAC were. The last minute deals (or announcements) are a releif to the street.

This all makes me optimistic that shipping stocks will do well today. Good Luck. I will try to update the Baltic Info later.

Jan 16 06:42 AM

[David White:]

The BDI is down again today. The Capesize Spot Price is down to $14380 (-$1006). Chinese New Year is Jan. 26, 2009 this year. The two week celebration operates on the lunar calendar. Perhaps we are already seeing a slow down??? In any case this is bad news for shipping for the immediate term. However, the fundamentals from the Chinese infrastructure heavy stimulus package remain in place. With the markets rebounding from the greater security of BAC and C, I would expect EXM and DRYS to go up today also. They are both up in the premarket. We will have to see how they fare once the day begins for the average investor.

Longer term we will have to wait to see how the markets fare next week. However, the introduction of the democrats stimulus package is a positive step. So far I have heard numbers of both $825B and $875B. However, it is expected to grow as it moves through the House and Senate. A big number is a good thing for the markets right now. It will mean more immediate term job creation and spending. It will help the US economy weather its storm.

Jan 16 09:20 AM

[David White:]

Apparently there is again forced selling (due to redemptions) coming from the hedge funds. Be careful next week.

Jan 16 09:31 PM

[einstein p ...:]

It's a trader's market. Why bother to look at the fundamentals or anything else? Trade the channels until they break down.

I own several dry bulk shippers at no risk via channeling. Some of these companies were insanely cheap and easily doubled or tripled before stalling out. If you bought them and averaged down to a cost of zero, reinvest the dividend on house money. Once you are in this position the balance of this conversation is absurd. Cut the dividend? Who cares? Stock goes bust? My average cost value is zero on the core position and the dividends, if held intact, cover the risk.

This is a trader's market. Throw the fundamentals out the window, pick wisely, and mitigate your risks. There is plenty of money to be made in this type of environment --- although it stinks to high hell.

What are the choices? Money under the mattresses? Money sitting in C or BAC? How about a rebound in AIG? I've listen to the talking heads recommedn these stocks, including retailers and home builders, for over a year. Wrong then, wrong still.

Trading the dry bulk shippers, the American and Canadian oil and nat gas trusts, and anything with a decent dividend. Infrastructure is going to require shipping and infrastructure companies, along with coal, grains, seeds, and other commodities. Oil is going to go higher and it's going to go higher much faster than the market expects

Putin put his hand on the valve. The rest of the Middle East does not have the luxury of being so direct.

China and India have problems sans growth, albeit different that Iran, Mexico, Nigeria, Saudi Arabia, Venezuela, etc. Social programs and terrorists cost money.

Get real, go long --- and trade the channels. Capitalism is still okay if you have to put the kids through school.

Jan 17 12:48 AM

[Dag:]

Stanislav has a good point on the supply demand situation of ships, in two years the amount of dry bulk vessels will almost double which will keep prices down. Another factor one should take into account is the contracts, According to industry paper Tradewinds one of the biggest players, Korea Line is trying to renegotiate all contracts and cancel new buildings. Korea Line have chartered in 450 vessels (10% of the world fleet), and is probably the largest counterparty in the dry bulk market. If 450 contracts fail, this will have a devastating effect on DRYS, EGLE and GNK NAV whichwill be negative.

On Jan 14 04:03 PM Stanislav Oleynikov wrote:

> The only commodity that is really important for drybulk shipping,
> at least as far as Chinese import and capesize market are concerned,
> is iron ore.
>
> Last year China imported only about 6 million tonnes of coking coal
> and about 36 million of power coal. It compares with more than 410
> million tonnes of iron ore imports.
>
> The amount of other commodities in dry bulk shipping routes to China
> is marginal.
>
> What really important for shipping rates is supply vs. demand picture.
> This issue was not address in the article.
>
> There was really significant activity in chartering ships to haul
> iron ore to China in the last several weeks. Over 150 spot capesize
> vessels are heading to China at the moment. It compares with virtually
> zero activity in the spot market two months ago and may easily lead
> to oversupply of iron ore in Chinese ports again by spring.
>
> But even such frantic chartering activity could not significantly
> rise spot capsize rates above OPEX level. Current spot level of $15,684
> looks decent (though it only a fraction of the rate required by overleveraged
> US listed bulkers like GNK, EXM, DRYS, which bought a lot of their
> levels at huge bubble prices, to stay afloat).
> However, not a lot of currently idle capesize vessels are able to
> get this kind of rate at the moment. BCI index is actually determined
> by rates on several shipping routes. In Europe, where it is hard
> to find an available capesize vessel, it is possible to charter a
> ship for $24,096 a day in the moment. But in the Pacific, where most
> of the trade is actually concentrated (on Australia to China route),
> the spot rate is only $6,036, still below OPEX level. This is the
> region where most of the idle vessels are located in the moment.

>

Jan 18 06:33 PM

[kr310:]

I'm long on EXM and have been feeling good about the future until I ran across an article on China Coscos new fleet of 412 dry bulk ships. That's a 32 million dwt capacity compared to EXM's now 49 vessels at nearly 4 mil. dwt.

findarticles.com/p/art...

Wonder if you could comment on the kind of competition we might have to look forward to.
Just when I was thinking that EXM could overtake DRYS for the number one position!

Jan 24 09:43 PM

[David White:]

DRYS crashed at the end of last week as they announced losses due to their cancellation of a lot of new capesize ships they had ordered. They had to pay to cancel. However, they did show good management for these negative times by paying a good amount in stock as opposed to cash. This dilutes people shares. However, this situation should leave DRYS in a much more stable position going forward in 2009. They still have about $1B in accessible cash to see them through the recession.

As for the total number of ships that will be available in 2009 and 2010, it seems very much debatable at this time. It is likely many of the ships scheduled for delivery in 2009 will be delivered. However, there are cancellations even in 2009. There are probably more for 2010, since those contracts are easier to cancel. It is unclear to me what the exact situation will be in 2010. Once the recession ends, there will be a bigger demand. The larger number of ships may be just about right for that demand, if these cancellations continue as they have been.

I think DRYS still looks good going forward. I think a lot of people will try to renegotiate contracts soon. I also think the BDI will continue to go up due to the China infrastucture heavy stimulus package. This should provide a big boost to the BDI as we move further into the year. The US stimulus package should help too in a more indirect way. I see some problems in shipping, but stocks like DRYS and EXM still look like relative bargains to me. If the BDI keeps rising in the way it has been, this will decrease the pressure to renegotiate contracts. The Chinese infrastructure heavy stimulus makes me think that it is likely that the BDI (especially the capesize spot price) will keep rising.

However, all this discussion makes me realize that quite a lot of ship orders are being cancelled. This can only be bad for the ship builders. I think I will look into shorting ship builders.

The BDI was up the last two days of last week. The capesize spot price now stands at $17,894. The BDI index is at 980. The recent trend is overwhelmingly upward.

If there is a break in this trend over the next two weeks, one might consider that the Chinese New Year celebration may be a very plausible reason for a two week lull (someone else reminded me of this).

Jan 24 09:57 PM

[David White:]

"Cia. Vale do Rio Doce, the world’s largest iron-ore producer, was raised to “buy” from “neutral” by Nomura International Plc on prospects Chinese demand will revive by the end of the first quarter. “Given the significant scale of the policy response announced so far, particularly in China, we believe investors should buy mining shares now,” London-based analyst Paul Cliff wrote in a report dated yesterday.
Nomura also raised Kazakhmys Plc, Kazakhstan’s biggest copper producer, to “buy” from “reduce”. " (Bloomberg)

This action by Nomura would ten to substantiate my thesis that dry bulk shipping rates should be improving for the next 2-4 months due to the China infrastructure heavy stimulus.

Jan 25 04:20 PM

[Mai:]

Hi David: do you have any info about whether EXM will keep its dividends? Thanks!

Jan 28 09:22 AM

[David White:]

Mai: Sorry I have no data on that. I am sure EXM will try to keep their dividend. Whether they do or not will likely depend upon their financial situation.

A couple of people above talked about Koreans trying to cancel their contracts with shippers. I imagine they are mostly trying to renegotiate, especially since their steel industry is being hit hard. They may actually be trying to outright cancel some of them. Whether they are successful in renegotiating will likely depend on how quickly the Baltic Dry Index rises. It has continued to rise since I wrote this article. In addition China is now talking about a further stimulus plan. If such a thing occurs, that will likely help the Baltic Dry Index rise still further. The more the index rises, the less chance of cancellations and renegotiations, which would be the likely catalysts for a dividend cut or cancellation by EXM.

DRYS already cut their dividend completely due to all of their recent expenses, largely associated with getting out of new ship build contracts. However, DRYS is apparently still on the hook for about $650M in contracts for deep sea oil rig new builds. They have a lot more near term problems than EXM. Still DRYS has huge upside potential.

The most important thing to watch is likely the economy (and the stock markets as a guage of the economy). The markets usually pre-sage the economy by about 6 months. If they put in a new bottom soon (some people are talking about DJIA of 6000), this may be a very bad sign for heavily leveraged dry bulk shippers. Thus far the market seems to be trying to keep DJIA of 8000 in sight. We'll have to see. The jobs numbers this week may have some impact on this situation.

Feb 02 05:13 PM

[EML:]

David with the current economy and the fact the baltic index is above 1300 today which of the dry bulk shippers do you think has the most upside potiential all things considered. I am really considering a position in drys or exm. Of the two which do you like more?

Also any thoughts on YGE


On Feb 02 05:13 PM David White wrote:

> Mai: Sorry I have no data on that. I am sure EXM will try to keep
> their dividend. Whether they do or not will likely depend upon their
> financial situation.
>
> A couple of people above talked about Koreans trying to cancel their
> contracts with shippers. I imagine they are mostly trying to renegotiate,
> especially since their steel industry is being hit hard. They may
> actually be trying to outright cancel some of them. Whether they
> are successful in renegotiating will likely depend on how quickly
> the Baltic Dry Index rises. It has continued to rise since I wrote
> this article. In addition China is now talking about a further stimulus
> plan. If such a thing occurs, that will likely help the Baltic Dry
> Index rise still further. The more the index rises, the less chance
> of cancellations and renegotiations, which would be the likely catalysts
> for a dividend cut or cancellation by EXM.
>
> DRYS already cut their dividend completely due to all of their recent
> expenses, largely associated with getting out of new ship build contracts.
> However, DRYS is apparently still on the hook for about $650M in
> contracts for deep sea oil rig new builds. They have a lot more near
> term problems than EXM. Still DRYS has huge upside potential. <br/>
>
> The most important thing to watch is likely the economy (and the
> stock markets as a guage of the economy). The markets usually pre-sage
> the economy by about 6 months. If they put in a new bottom soon (some
> people are talking about DJIA of 6000), this may be a very bad sign
> for heavily leveraged dry bulk shippers. Thus far the market seems
> to be trying to keep DJIA of 8000 in sight. We'll have to see. The
> jobs numbers this week may have some impact on this situation.

Feb 04 04:00 PM

[EML:]

David with the current economy and the fact the baltic index is above 1300 today which of the dry bulk shippers do you think has the most upside potiential all things considered. I am really considering a position in drys or exm. Of the two which do you like more?

Also any thoughts on YGE


On Feb 04 04:00 PM EML wrote:

> David with the current economy and the fact the baltic index is above
> 1300 today which of the dry bulk shippers do you think has the most
> upside potiential all things considered. I am really considering
> a position in drys or exm. Of the two which do you like more?

>
>
> Also any thoughts on YGE
>
>
> On Feb 02 05:13 PM David White wrote:

Feb 04 04:01 PM

[David White:]

I like them both. If you are going to hold the stock for a while, I like DRYS best because DRYS is planning to spin off its Ocean Rig deep sea drilling unit as a separate company in 2H 2009. 75% of the company will go as a dividend to stockholders of DRYS. Plus DRYS has been beaten down recently due to its financial problems. However, DRYS has taken dramatic measures to alleviate these problems recently. It looks like DRYS should be fairly solvent going forward. The did file to be able to sell $500M more of their stock. However, there is no set date on this. I tend to think most if not all of this new stock sale will occur after the spin off. In that case, you will do incredibly well with the spin off. The estimates for that dividend of stock to a DRYS holder were about $30 by Mr. Economou last year. Even if you say that value is only $10. You would still have the DRYS, which wouldn't likely go down. DRYS is retaining 25% of the new companies stock itself. Plus you would have the stock in the new company. If there is huge dilution of DRYS by the shelf registration sale before then, you won't do as well. However, it is still likely you will make good money. When the spin off occurs, the value of DRYS stock will likely go up as they are retaining some of the new company's stock. You will benefit two ways. Also the BDI is at 1642 as of Friday morning. The capesize spot price is at $30,001, where it had been around $15,000 just two weeks ago. The market in the dry bulk arena is definitely improving quickly. DRYS is a big buy at its current price, even given the recent fiasco with its new build cancellations.

Feb 07 03:56 PM

[David White:]

Since DRYS has been beaten down recently because of its financial problems, I like it more as a long term buy. The BDI is up to 1642 as of Friday. The capesize spot price is $30,001. Things are improving quickly. Plus DRYS is planning to spin off its deep sea oil drilling operations as a separate company in 2H 2009 (currently). This may get delayed further until 2010. However, DRYS stockholders will get 75% of this company as a dividend (i.e. shares of stock in the new company will be given as a dividend to DRYS share holders). DRYS did file a shelf registration for the sale of $500M of its stock. At current DRYS stock prices this would significantly dilute shareholder value. However, there is no date for this sale. I am guessing that Mr. Economou will want to hold off on at least most of the sale until after the Ocean Rig spin off. Then the price of DRYS stock will be higher. Plus he and companies he has interests will get more of the new company. It's in his interest to do this. Hence the fact that DRYS has cut their dividend for the immediate term doesn't bother me that much, as long as I am planning to keep DRYS until after the spin off. I do not believe DRYS will go bankrupt. They have taken significant steps toward ensuring their near term fiscal viability by cancelling a lot of the new build deliveries (at an expensive price). Going forward there is much less risk of big problems. They renegotiated the terms of their loans with Piraeus. They sill have to work out term with their other major lender. However, I see them as doing this. I think DRYS at its current price is a big buy.

Feb 07 04:13 PM