Capesize Rates Plunge For Dry Shippers. Now What?

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 |  Includes: DRYS, DSX, GNK, NM, SBLK
by: The Specialist

Since hitting their peak on September 25, 2013 at $42,511 per day two and a half weeks ago, Capesize rates are down over $10,000 per day to $32,382. Smaller ships such as the Panamax and the Supramax have continued their rallies, currently sitting at $16,233 and $12,355, respectively. The Panamax rates are up $4,888 or 43% in just 3 weeks while the Supramax rates are up $2,411 or 24%. The sudden increased operating profitability of Panamax and Supramax ships has been jaw dropping.

As usual, the entire group of dry shipping stocks moved as if they were all part of the same company, like ants all marching for the same cause. The market's failure to distinguish between them is the individual investor's potential opportunity. Last week, DryShips (NASDAQ:DRYS) dropped 9.5%, Star Bulk Carriers (NASDAQ:SBLK) dropped 5.8%, Genco Shipping & Trading Limited (NYSE:GNK) dropped 9.8%, Diana Shipping (NYSE:DSX) dropped 4.8%, and Navios Maritime Holdings (NYSE:NM) dropped 6.7%.

But not all dry shipping companies are affected equally. For example, Genco Shipping's entire fleet is based on spot rates so of course the $10,000+ decline in Capesize spot rates is going to sting badly. Meanwhile though, DryShips' entire Capesize fleet of 12 vessels is all locked into contracted fix rates. This means at least for now the change in rates for Capesize vessels has had zero effect on DryShips, yet the stock price fell just as badly as Genco. In contrast to DryShips' Capesize vessels, most of its Panamax fleet operates at the spot rates. This means the continued rise in spot rates for DryShips is a boon for the company, yet the Capesize rate drop is meaningless for now.

As of August 27, 2013, Star Bulk Carriers had 86% of its 2013 days already under contract and 90% of the Capesize days. This means the daily, weekly, and even monthly swings in rates has little meaning across the board for Star Bulks until 2014 and later. The stock price gyrations in reaction to the change in rates are pure emotion.

For Diana Shipping, its entire fleet as of July 30, 2013 is under long-term fixed-rate locked contracts. The change in rates, for now, is completely meaningless to investors in Diana Shipping. Investors who buy or sell Diana based on the daily change in rates are betting that the daily change have a long-term effect, which isn't likely. When this happens, it may be time to buy, sell, or short accordingly, if one is waiting for an entry at a time when the price movement is irrational.

Navois Maritime had 84.6% of its fleet operating days locked for 2013 in fixed-rate contracts including all of its Capesize vessels in long-term contracts. Just like DryShips, the change in rates for Capesize is just noise for now to investors.

Conclusion

An informed trader or investor is a better trader or investor. Understand how the rate impact affects individual names. Rates affect ships in different ways and sometimes not in any way at all. DryShips, as an example, has recently seen a complete disconnect in the trading of its stock and the change in rates. The stock price gets beat up when Capesize rates fall -- a rate that has no effect on it. Yet its Panamax vessels are witnessing almost a dream come true. Most of them are not under contract and are thus immediately able to take advantage of the surging spot prices. Study the fleets and their contracts for dry shippers before having the same knee-jerk reaction as the market. Based on current rates, DryShips is poised to have bigger positive change quarter for Q4 than it has had in years, especially compared to its peers, who are affected in less advantageous ways by the changing rate environment.

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.