Dry bulk shipping is back after a terrible 2012. This year Dryships (NASDAQ:DRYS) is up 140%, Navios (NYSE:NM) is up 110%, Safe Bulkers (NYSE:SB) is up 100%, Baltic Trading (NYSE:BALT) is up 70%, Diana Shipping (NYSE:DSX) is up over 65%. The Baltic Dry Index (BDI) measures dry bulk shipping rates and was at only 698 on Jan. 2 but is now over 2,000. Shipping rates are affected primarily by the balance between supply and demand and by seasonal factors.
Earlier in the year rates were so low dry bulk shippers were not able to cover operating costs. This was due to a mismatch between supply and demand. In a previous article I discussed why supply and demand are coming in to better balance and this is showing up in the BDI.
Where is dry bulk going to go from here? I think dry bulk is going higher on seasonal strength. The increase in the BDI has mostly been from the larger capesize ships on Chinese demand for iron. Iron shipments will probably remain strong until Chinese iron ore inventory is replenished but inventories remain well below last years levels.
Fall is harvest time in North America and we have a big grain harvest coming in. US bulk agriculture exports typically rise 50% from September to October. In 2012 the value of exports rose from $4 billion in September to $6.4 billion in October. We have a record crop this year and strong demand due to bad weather in China.
Safe Bulkers CEO Polys Hajioannou said he was keeping his panamax in the spot market because he is expecting panamax rates to rise in the fourth quarter on strong grain sales. Dryships also has its panamax fleet in the spot market presumably for the same reason.
Because of these seasonal effects the BDI usually peaks in October or November (there was no fall peak in 2008 due to the economic downturn). It is tempting to take profits now and I have done a little trading but I think you want to wait until mid-October before you think about taking serious profits.
You can expect some seasonal weakness in shipping rates in the winter. The BDI usually bottoms in January or February. This may be a good time to get back in to dry bulk shipping. More on seasonal effects on the BDI here.
Strength in dry bulk shipping should continue into 2014. Shipping rates plummeted in 2012 because of massive oversupply of shipping. Because of the long (18 month) construction time dry bulk supply changes course slowly. The orderbook is fairly low now so there is little chance of oversupply for some time. Credit Suisse reports ("Cape rates to head higher; actions speak louder than words" Sep. 16, 2013) that Tim Huxley, CEO of dry bulker Wah Kwong Maritime Transport is optimistic about capesize rates. In his opinion supply will remain tight because most of the current orderbook consists of old options that will never be exercised, ship financing is tight and quality yards are booked up until 2016 already so the orderbook will remain at low levels. He is expecting to charter capes at higher rates in 2014.
My advice is to look to take some profits later in October and then consider buying again in February. Some have accurately commented on Seeking Alpha that DRYS is not a pure dry bulk shipper anymore. It is true most of DRYS value is in its drillships. I like DRYS because it has good liquidity and the shares tend to move with the BDI. I like SB but its volume is much lower than DRYS and the spreads on call options are very large. DSX is good but has less upside as a result. NM is also not a pure play dry bulk shipper but has had a lot more upside than NMM which seems like a good dividend play. EGLE and GNK may have the most upside but they look too risky to me.
By the way the Hellenic Shipping News reports the BDI in the morning.
Disclosure: I am long DRYS, SB, NM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.