Rally Boosts Shipping Firms

We had a big day for shipping firms today in the stock market, with SEA (Claymore-Delta Global Shipping ETF) moving up over 3%, and some shipping companies posting gigantic advances: EGLE up 16%, OCNF up 15%, GNK up 15%. So what is the real reason for the sudden optimism in this beaten-down, depressed and desolate market sector?

Most traders will probably point to the Baltic Dry Index (.BDI), which has been up about 10 days in a row, as the cause. Now it is over 3700. The market considers 4000 to be a portent of the recovery of shipping rates, leading to bigger profits. The yearly high is only a bit more, near 4200. This means that rates for new contracts have almost doubled in the past couple of months. The BDI explains a lot, especially the rate at which speculator money flows into the dry bulk names, but it is as much a symptom here as the stock prices are.

More important than the BDI are the underlying industrial activities affecting demand for shipping services. We see this in recent anecdotal tales of heavy bookings, especially in Pacific routes, carrying ore to China. BMTI reports:

The Cape spot market, helped along by a renewal in futures trading, rockets ahead for another day with day-on-day upgrades most dramatic on the Pacific round voyage, which some owners tell BMTI looks like a pinball machine with relets bouncing back to double relets. Ships that are currently getting up to US$67,000 daily on Australia/China rounds were settling for US$55,000 just five short days ago.

The slightly smaller Panamax ships, commonly used for grains, have been cornered by firms trying to get foodstuffs to countries with marginal harvests this year. Delays in US harvesting due to weather are complicating the situation, causing shipping demand to become more concentrated in time and location, leading to some increased rates.

Dry bulk shipping stocks (DRYS, GNK, EXM, NM, DSX, PRGN, EGLE, TBSI, SBLK, ULTR, and FREE) should benefit as farmers should be able to harvest a decent amount of crop in the near-term, which should boost demand and thus daily time charter equivalent rates for the smaller and mid-size vessels. This increased shipping activity will primarily affect Panamax ships. (briefing.com)

In addition, economic numbers from China last night showed that industrial production was 16.1% higher year/year for the month of October, and core machinery orders surged 10.5% month/month in September. This final datum carries enough weight that non-speculator money is, at long last, eyeing the shipping stocks as possibly a rational play for early 2010. In a sector where P/E numbers are tiny (generally in the range of 4-8) and price/book numbers are laughable (averaging around 0.50, some much lower) you would normally expect to see a few bankruptcies going on, but aside from a small British shipper last year, there is no one going out of business to explain the massively depressed shipping stock prices. Clearly, there is ample room for stock price improvement, and that means that the shippers, as a sector, remain in the eyes of Wall Street as the last and most severely unrecovered stock sector left in this recent bull market advance, the last shoe to drop.

The recovery of shipping cannot be separated from the recovery of the world economy - it is so closely related, that we can say both "The shipping stocks are low due to not having a real recovery yet." and "The depressed shipping stocks prove that we don't have a real recovery yet." Conversely, some rational normalization of shipping stock prices is inevitable as economic recovery takes place, and we can bet that end-of-year money desperately wants to be sure to be in on it, if a case can be made that earnings have finally bottomed.

Fundamentals aside, we have seen some real, honest earnings beats too. Yesterday, DSX beat on the top and bottom line, and earned a Cramer endorsement. Micro-cap PRGN matched with beats of its own. Earlier, GNK and DRYS both bested Wall Street's expectations in posting their earnings. Prospects for the near future include upcoming earnings reports from FREE, NM, DHT, SBLK, SFL, FRO, and NMM. The market will concentrate some of its incoming money into these last earnings reports, expecting one or two more excellent reports to add fuel to the fire. Therefore, these names are among those to consider for taking on a position. As usual, any topping behavior in these stocks will be met with the usual heavy shorting, but careful management of positions can help to diversify risk. Try to trade in increments and avoid joining late in any explosive up move which may develop in one of these stocks. The best we can hope for in this early stage, if the shippers rally significantly, is a series of rising waves of stock prices, interspersed with pullbacks of at 20% or more.

Disclosure: My own positions right now include NM, EGLE, EXM, and OCNF.

Comments

[Shipping Guru:]

The real issue is on the supply side. 64% of current orderbook to be delivered over the next 3 years.

Nov 13 12:27 AM

[parkwood:]

If you want to talk about the shipping fundamentals, you should ignore these current BDI numbers and stock prices, because they are daily noises. Within the time frame of several months to a couple of years, I didn't see any significant change happening to the fundaments, although BDI was easily doubled recently.

Grain and coal deliveries are the short term factors, the most important factor is still the seaborne iron ore trade, China now accounts for 70%, Europe and Japan are just the small roles, and their recovery roads are still very rocky. When you try to understand the current BDI, there may be a couple of small things being easily ignored by most of people.

1) CISA has planned to change the starting date of yearly contract price execution period from April 1st to Jan. 1st. The miners are now asking 30-35% price increase next year, there has huge uncertainty of 2010 price, but it is widely expected to pick up, this has triggerd the mills and traders stockpiling before the year end. Now the daily CAPE rate almost tripled in the past month, the mills are still facing the pressure to cut their output because of weak market. When the high shipping fees are eating their thin profits, I don't think they will accept much higher shiping rate even under current circumstance.

2) Last week the China Customs released the data of Oct. iron ore import, it was 45.47 million tons, 30% drop from the record high Sept. import of 64.55 million tons. Because this clearance result reflects the actual purchase of Sept., obviously the primary reason was the steep drop of china steel market price at that time, this gives you a chance to look at the maybe real demand/supply of BDI without the current bubbles, you see the BDI dipped to close 2000 on Sept., there has clear connection between them. Here the question is, do you believe china ore stockpiling is endless? If they cut their purchase 30% again after that, how much will the BDI be?

BDI and drybulk stocks are red hot these days, if you want to invest on it now according to these current numbers, it may not be a sure bet. My gut feeling is, no matter how crazy it will be, BDI probably will go back to flirt with 2000 no later than the next first quarter.

Nov 16 09:45 PM