In September I wrote an article titled Understanding The Supply And Demand Of Dry Bulk Carriers that outlined how iron ore and coal were driving the rise in the dry bulk market. Since then shipping companies have seen shipping rates soar over the past four months. While the rate surge was driven primarily by an increase in Chinese iron ore imports, there are signs the surge may continue and sustain the increased rates.
Rates spiked in September for Capesize ships, reaching just over $40,000 per day before pulling back to $20,000 and reaching close to $40,000 again in December. While the pullback seemed drastic, at $20,000 it still represented in a 12 month high. The spike of the Capesize rate has also helped to pull up the Panamax rates to 12 month highs which will help the dry bulk companies to once again reach profitability.
Iron Ore continues to drive the rates…
Capesize rates are primarily driven by Iron Ore exports from Australia and Brazil to China. With the falling Iron Ore prices, Navios Maritime (NM) predicts this will force China to source their ore from higher quality suppliers in Australia instead of consuming their lower quality nationally produced ore. Both Rio Tinto (RIO) and BHP Billiton Ltd. (BHP) are projected to boost Iron Ore output from Australia for the next few years in order to meet the projected demand from China. For 2013 China will finish with 793 million tons imported and predictions are they will import just over 7% more with 852 million tons.
DryShips Inc. (DRYS) presented in their 3rd Quarter presentation that new buildings will slow down to a normalized rate and demolitions will pick up during 2014 and 2015. While this was the projection for the fleet, the increase in rates may slow down some of the scrapping during 2014. Expansion of the fleet through newbuildings is not as rapid, however, if companies feel the level of the rates is sustainable, they may increase the order books for deliveries into 2015 and 2016.
I still remain bullish for DRYS. Their stake in Ocean Rig UDW Inc. (ORIG) has helped to sustain them through unprofitable times, and will help them resolve their debt issues. Their exposure to the spot market during 2014 and 2015 will increase their profitability over what they would have if they maintained the fleet on contract. This was a gamble George Economou made a few years ago and appears that will pay off shortly.
DRYS has daily operating costs for their fleet of Dry Bulk shippers of just under $6000 per day and right at $7000 for the tanker fleet. While the breakeven point will be slightly higher when debt payments and administrative overhead is added in, the table above helps to illustrate how profitable the company will be as rates continue to increase.
I believe the iron ore demand will help sustain current rates and drive DRYS to profitability. Once the company is cash flow positive, I believe it will restart the dividend the company was issuing.