Over 90% of international trade is carried by the shipping industry, as it is the most cost-effective way to move goods around the world. Despite this, the shipping industry has been struggling with harsh market conditions in recent years. Almost every shipping giant suffered more than a 70% decline in their share price. In this struggling shipping industry, DryShips (NASDAQ:DRYS) still has a great upside potential and can prove to be an attractive investment opportunity.
The dry bulk carriers suffered largely due to decline in demand for coal and metals from China. In August, China's iron ore imports, the single-biggest source of demand for the vessels, increased 10.5% year-on-year but down 5.6% from July imports. Australia, the largest iron-ore exporter, projected China will import 872 million tons in 2014, 8.3% more than previously forecast. Australia's iron ore exports are estimated to surge at an average annual rate of 8% a year between 2014 and 2018.
The Baltic Dry Index (BDI) has seen an incredible increase this month and touched its highest level since the start of 2012. The present increase in the Baltic Dry Index is because of more iron ore going to China. It is very difficult to predict that the current increase in the index is sustainable or not. China is the world's largest steel producer. If the consumption of iron ore and coal, the main two products for the bulk carriers, increases in the future, the Baltic Dry Index will also increase. Even a 10% or 15% increase in the index and rates definitely benefits the ship owners. Bank of America estimated that freight rates of dry bulk carriers will show a significant increase by 2015. The steady growth in the shipment cargo industry is set to continue until Chinese iron ore inventory is replenished.
India is likely to surpass China as the largest importer of coal in the next 3-5 years. India overtook South Korea as the third-largest importer of seaborne metallurgical coal in 2011. The country's economy is estimated to grow between 5.5% - 6.5% this year. India's coal demand is estimated to reach 769.69 million tons by 2013-14 against the domestic availability of 614.55 million tons.
Emerging markets are urbanizing and have an increased need for new infrastructure. Chinese steel demand will increase in the coming years due to continued urbanization. As more people are moving into cities, China needs to build residential property and infrastructure. Property construction will drive steel demand in the future.
DryShips is a diversified player focused on the larger end of the dry shipping market. The company is projected to lose $0.26 per share in 2013. In 2014, DryShips is expected to generate profit around $0.33 per share. DryShips went through a number of liquidity problems earlier, which are disappearing slowly. At present, the company has a total debt/equity ratio of 117.12x, which is still high but situations have improved. Over the past few months, DryShips has been selling some of its assets to reduce its debt, which is a good sign.
DryShips is gradually transforming itself into an ultra-deepwater drilling company rather than continuing as a simple dry bulk cargo operator. The company, through its majority owned subsidiary, Ocean Rig (NASDAQ:ORIG), owns and operates 10 offshore ultra deep-water drilling units comprising 2 ultra deep-water semisubmersible drilling rigs and 8 ultra deep-water drillships. DryShips currently holds a 59% stake in Ocean Rig. At the end of Q2 2013, Ocena Rig had $6 billion of backlog in orders. Ocean Rig has a bright future. Due to the discovery of several deepwater oil reservoirs, the demand for offshore drilling services is projected to grow from $73.1 billion in 2013 to $121.1 billion by 2018.
Patience is the key word while investing in the shipping companies. The long-term future of DryShips is bright. Improvement in the Baltic Dry Index is a sign of recovery. The global economy is improving making a slow but steady recovery. Over the next 18 to 24 months, we will see a significant increase in the company's stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.