The Death of Shipping and BDI Is Premature

In August and September the outlook for shipping and dry bulk shipping rates, was very poor even while the stock market surged up in September. This resulted in more articles predicting Stock market doom. But in October the rate has moved up, as world trade in the Atlantic is improving. The rate has moved up about 30% .

Dry bulk shipping's Baltic Dry Index (BDI) is back on the up, just shy of breaking the 3,000 level once again. What's striking about the rally is that Fearnleys highlights strength in the Atlantic (not pacific) as a key driver of recent strength.

Fearnleys reports:

Fearnleys: The Capesize market has experienced a healthy improvement this week, mainly driven by the demand for ships in the Atlantic. One week ago the rate for a transatlantic round was slightly below $43,000 daily, against current $58,000 daily. The tonnage balance in the Atlantic remains tight, and supply of fresh cargoes is steady. The fronthaul market is up from high $25 pmt to around $30 pmt basis Tubarao/China. In the east the 3 most influential charters; BHP, Rio Tinto (RTP) and FMG are all active, supporting the positive trend in rates and an optimistic sentiment.

The Baltic Dry Index (BDI) is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk

Container shipping traffic is one of the best barometers out there when it comes to the global economy. So, it's encouraging that Drewry's latest October outlook forecasts container shipping rates for major East-West trades will rise 18%.

Global container trade volume should recover slightly in the second half of 2009, and through 2010.

It is expected that there will be a recovery in trade flows for 2010. But capacity is also expected to rise. So, it seems the supply/demand balance will remain poor into 2010. This would be a good time to consider names like DRYS, EGLE, DSX or GNK. It's doubtful these stocks will increase as much as the index but the may return to their May 2009 levels as they usually track the index.

Comments

[Mobywhite:]

I believe the long term (2-10 years) potential for the shippers is very strong. The BRIC countries and many other poor countries in the world are growing rapidly and this is allowing many people within these countries to join the middle class where they start consuming many more goods and services. I believe this increase in consumption is going to keep the shippers busy in the long run.

I've read a lot of material about the massive amount of tonnage being built by the shippers and coming online in the next couple of years. This is obviously of concern but seems a logical result to me of the shippers seeing an increase in goods shipped and the increase in consumers that is happening now and for the foreseeable future.

I don't think these stocks will do much in the next six months, but in the long run these companies should do well as many of the well run ones are sitting at 30% of their previous highs.

If I knew how to link a spreadsheet I'd by happy to share the analysis I did on about a dozen of the better shippers. It led to me purchasing DSX which is clearly the best run of the shippers, SBLK, VLCCF and TDW.

Oct 30 12:27 PM

[ramisle:]

The growth of the fleet is expected to be much greater than even the highest expectations of the growth in demand for the next two years. China is importing Iron Ore and Coal at a pace that surpasses demand for Steel, and can't be expected to add more demand than it already does.
Arcelor Mittal, the biggest steel maker in the world, projected a tepid recovery for worldwide Steel demand, especially given the pricing pressure from China's massive production.
One thing that should not go unnoticed, Vale, the largest Iron Ore producer in the world has purchased 20 older Capes and VLOC's this year and has ordered 28 new VLOC's to be built. They have also signed several long term charters with the big Japanese and Korean shippers to secure a consistent freight rate. They will become nearly self sufficient in transporting their product.
I can't express enough, the effect this will have on the BDI, when Vale no longer needs to hire spot ships to deliver it's ore. Much of the recent rise in the BDI can be attributed to port congestion in the Coal ports of Australia, and the annual grain shipments. The FFA's are showing a precipitous fall in rates through 2010.
It's simply too early to jump into Dry Bulk. Make money elsewhere and return to this sector next year. And yes DSX, NMM and NM are in very good shape, most of the rest have serious consequences from breaches of loan covenants, high debt, dilution at poor prices, and commitments to purchase ships at inflated prices. PRGN, SBLK, and EGLE have reset charters at much lower rates, EXM, and DRYS have massive debt. TBSI has a fleet of small ships that are 80% over 20 years old, and 40% over 25. OCNF is a total disaster, soon to have 450 million shares outstanding.
Fearnleys is a great source, as well as:
drewreys.co.uk
weberseas.com
brs-paris.com
cotzias.gr
worldyards.com
lloydslist.com
nilimar.com
platou.com
steelguru.com
chinamining.org
tradewinds.no
drybulkindex.com

Oct 30 11:04 PM

[William M. ...:]

Thanks Moby & Ramsile for good comments and links. Adding to your points....Yes, most agree Diana Shipping (DSX) is the DRY BULK shipper with little debt and safest play in this sector.

If your looking at Oil Tankers I'd get FRO at or below $23. TK is a good combo play. EGLE I like to follow because it's US based. TDW is not a shipper but is an excellent oil service stock at the right price. Between EXM and DRYS I'd choose DRYS now at a price of $6 with two upgrades and two quarters of good reports that bounce the stock back up to $7.50 each time. They have a locked in client base through 2010. Moving to stockpile vast quantities of natural resources, China has helped to fuel a minor resurgence in dry bulk demand that permitted DryShips to lock in 87% of shipdays through 2010, which yields $1.6 billion in fixed EBITDA over the next 2.5 years. Yes, the bad news to DRYS is the debt (which has been made manageable) and worst, the dilute share offerings have exploded the share count by a factor of five over the past. One must always beware of Greek Shippers. DRYS, CEO George Economou is as greek as they get.

Most of these stocks are selling below their May levels. The all fell slowly back as BDI rates fell off after China's Q1 and Q2 stockpiling stopped. Yes, world wide shipping has been booming the last 20 years but these stocks should only be viewed as cyclical plays.

Oct 31 12:08 AM

[Ecomike:]

NMM is probably the safest play with a huge dividend. I still think PRGN is way undervalued.

Nov 01 01:44 AM

[mattfinance:]

A great source to use for the shipping industry is

CapitalLinkShipping.com

It has information on listed shipping stocks, stock market and freight indices etc.

Also, us the Capital Link Maritime Indices that enable a comparison between the evolution of individual stocks to the shares of their public peers, to the freight indices and to the stockmarket in general. If you track these correlations you will see quite interesting trends emerging.

Nov 02 10:59 AM

[colonel:]

Please tell me why OCNF is a "total disaster" (ramisle comment) and not a good buy. Also, ramisle stated they're soon to have "450 million shares outstanding"! Please explain.

Thanks for the help.

Nov 05 12:53 PM

[ramisle:]

Look at SEC form 424B filed 9-25-09, they will be selling 335 million more shares to YA Global. Add that to the 90 million they have now.
They lost money with rates in the $20,000 to $30,000 per day range and rates are not expected to get better soon. Tanker rates are expected to be worse.
They sold the Richmond and Juneau which earned a combined 77,000 per day and took a loss on the sale. They are being replaced by 3 Capes which will earn a combined 80,000 per day, and cost them a combined 180 million.

Nov 05 08:56 PM

[colonel:]

Thank you for the help! Here's another question: I own 30K shares at .93c. With earnings rpt due out next week would you sell? I don't mind holding with hopes OCNF will move higher. What do you think? Again, thanks for the help!!!

Nov 05 11:12 PM

[ramisle:]

Sorry colonel, I never try to predict what the price will do.
I think the dry bulk stocks can be traded often, but if you are waiting for a double then it could be a long frustrating wait. They have become a darling of the traders, and you never know what will cause it to spike up.
The dry bulk fundamentals suck for a few years, there are just too many ships being built. But that doesn't seem to dampen the unbridled enthusiasm of people who think a stock that fell to $3 from $130, will somehow get back there.

Nov 06 08:40 PM