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Diana Shipping Inc. (NYSE:DSX)

Q2 2010 Earnings Call

August 05, 2010 9:00 am ET

Executives

Edward Nebb - IR

Simeon Palios - Chairman and CEO

Anastasios Margaronis - President

Andreas Michalopoulos - CFO

Ioannis Zafirakis - EVP

Analysts

Jon Chappell - JPMorgan

Joshua Katzeff - Deutsche Bank

Gregory Lewis - Credit Suisse Group

Fotis Giannakoulis - Morgan Stanley

Doug Mavrinac - Jefferies & Co.

George Pickral - Stephens Inc.

Operator

Greetings and welcome to the Diana Shipping Incorporated 2010 Second Quarter Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Edward Nebb, IR advisor for Diana Shipping. Thank you, Mr. Nebb, you may begin.

Edward Nebb

Thank you very much Rob, and thanks to all of you for joining us this morning for the company’s 2010 second quarter conference call. The members of the Diana Shipping management team who are with us today are Mr. Simeon Palios, Chairman and Chief Executive Officer; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos, Chief Financial Officer; Mr. Ioannis Zafirakis, Executive Vice President and Secretary; and Ms. Maria Dede, Chief Accounting Officer.

Before management begins their remarks, let me briefly summarize the Safe Harbor notice, which you can see in its entirety in the release we issued earlier today. Certain statements made during this conference call, which are not statements of historical fact or forward-looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act.

Such forward-looking statements are based on assumptions, expectations, projections, intentions, and beliefs as to future events that may not prove to be accurate. For a description of the risks, uncertainties, and other factors that may cause future results to differ materially from the forward-looking statements, please refer to the company’s filings with the SEC.

And now without further adieu, let me turn the call over to Mr. Simeon Palios, Chairman and Chief Executive Officer of Diana Shipping Inc.

Simeon Palios

Thank you, Ed. Good morning and thank you for joining us today. I am pleased to report that Diana Shipping has continued to successfully navigate a volatile period for the dry bulk industry. We face an environment in which on the one hand the improvement in world economies should lead to greater demand for dry bulk shipping services. Yet on the other hand, the supply side of the industry is likely to face continued pressure on shipping rates and vessel values.

At this time, of a settled industry conditions we have reported increased earnings for the second quarter of 2010. Our ability to deliver this solid performance is a reflection of the strategies we have that should consistently throughout our history as a public company. Specifically, we have moved forward with efforts to grow our fleet, to build a consistent revenue stream and to maintain a [prosperous] balance sheet.

In particular, I would like to point out the following highlights of our second quarter financial results. Net income rose to US $33.9 million. Voyage and time charter revenues totaled US $68.7 million. Our average daily time charter equivalent rate was US $33,105 for the 2010 second quarter, which covers daily vessels operating expenses by a quarter of five and half times.

Diana has maintained a healthy balance sheet, which is reflected in a cash position of approximately US $298.2 million as of June 30, 2010. Also, we continue to operate with a modest amount of leverage, compared to our shipping company peers. Long-term debt including the current position was US $326.3 million at the end of the second quarter, compared with shareholders equity of nearly US $1.1 billion.

The major contribution with the solid performance has been our fleet expansion strategy. The company’s increase in revenues for the 2010 second quarter reflected the acquisitions of the investments, Houston, Melite and New York, all of which were added to the fleet between late 2009 and early 2010.

We also have continued to manage all of our vessels in a manner intended to produce trade, the revenues across the industry site. For example between June and July 2010, we announced time charter condos for high vessels; the Panamax vessels Dione, Oceanis, Nirefs and Calipso and the Capesize, Sideris GS. As a result of this activity, approximately 70% of our fleet is now charter for 2011.

Looking towards the future, we continue to be enthusiastic about our opportunities to make strategic investments in the expansion of our fleet. By taking advantage of present market conditions, we have increased the size of the fleet to 22 vessels as well as to [Newcastle] new billings on order for 2012 delivery.

We plan to continue this process in a focused and disciplined manner over the next 18 months, subject to market conditions in order to further enhance our revenue stream capacity to generate consistent revenues and drive increasing shareholder value.

We are confident that Diana Shipping remains well positioned to continue to build shareholders’ value. We have a proven growth strategy, reliable cash flow and a solid balance sheet to support our initiatives.

With that, I will now turn the call over to our President, Stacey Margaronis for a perspective on industry conditions. We will then followed by our Chief Financial Officer, Andreas Michalopoulos, who will provide us a financial overview. Thank you.

Anastasios Margaronis

Thank you, Simeon and a warm welcome, to all who have joined us in this mid-summer conference call. The second quarter was certainly one which reminded us all that volatility is the name of the game in the dry bulk shipping industry. Those who regard the shipping as a steady cash flow business, providing a nice steady dividend suitable for retirement or to consider more carefully their investment philosophy.

At the beginning of the second quarter this year, the Baltic dry index stood at 2,991 points and the equity closed at 1,967. The Baltic Panamax Index was a 3,708 and the equity closed at 2,607, while the Baltic Cape Index started the quarter at 3,429 and closed the equity at 1,939.

The Baltic dry index posted a 60% decline over 35 consecutive trading sessions before recovering somewhat over the last few trading sessions. By now the explanation of this rise in rates followed by steep drop and subsequent small recovery, all within a state of four months, is more or less agreed upon by shipping analysts and ship owners alike.

China’s iron ore imports rose and then dropped significantly in May and June, while iron ore prices reached a low of about $100 per ton before quickly recovering to around $130 per ton. The all-in costs of having this raw material shipped from Australia [into] about $155 per ton. This led many steel mills to pull back on import and focus more on domestic iron ore and stockpile draw down.

While all this was happening in the demand side, the face of vessel delivery was robust to say the least. At the same time easing of congestion in Australian, Brazilian and Chinese ports handling coal and iron ore further added to the over capacity situation especially in the larger bulk carrier sectors. So the first half of 2010 over 100-K have been delivered out of the total 220 vessels expected to join the fleet before the year is over.

Needless to say, there has been no scrapping to speak of so far this year, with only two Panamax vessels and four Capes being scrapped thus far. During the last two weeks, steel prices have begun to recover. The sentiment in China as regard to real estate construction has improved with the acceleration of social housing construction and the economic growth seems to be stabilizing if not picking up. This has led us to an improvement in rates about which we will talk again shortly.

Let’s look at world economic growth. International Monetary Fund expects the US economy to grow at 3.5% annual rate in 2010. This floats around 2.9% in 2011 and growth at about 2.6% in 2012. As regard to China, the IMF has increased its forecast of growth to metric product growth to 10.5% in 2010 and adjusted downward its growth forecast for 2011 to 9.6%.

In July, European economic confidence rose to its highest level in over two years, with index of executive and consumer tax in the new area increasing to 101.3 from 95 in June. At the same time unemployment in Germany dropped for the 13th consecutive month, during the month of June to 3.21 million.

The OECD, its forecasting that its 30 member nation will grow 2.7% in 2010, and about the same in 2011. Therefore, as far as the health of the world economy as a whole is concerned things look quite positive even taking into consideration the possible sovereign debt issues, present and future, for some European Nations. This should underpin the growth assumptions we will mention below over the next few quarters.

Let’s look at Chinese growth and worker productivity. In a recent lead article in The Economist magazine, the author explains that the single and most important change happening now in China is a combination of urbanization and protests over pay increases by Chinese workers.

The late Cambridge economist, Joan Robinson is quoted as having written that quote, “The misery of being exploited by capitalists is now being compared to the misery of not being exploited at all.” While this quote refers to the underemployment in Southeast Asia in the ‘60s, we also look back and recall that since then, growth has come about with capital [easily] exploiting growth of common workers in that region and in China, much to those nations benefit.

Now, the article concludes, capital has to invest in the creation of a skilled workforce, to fuel further increases in worker productivity and the governments to encourage resettling of workers and the new cities built for them, plus giving the capitalists the chance to train them while at the same time increasing their salaries. This should create higher net consumption, which in turn would fuel further economic growth not only in China and Southeast Asia but also in the West.

According to The Economist, a 20% rise in Chinese consumption might well lead to an extra $25 billion in American exports. That in turn would create an extra 200,000 US jobs.

Let us now look at developments affecting the major commodities shipped in bulk. Latest news affecting the iron ore trade is that the Chinese government has discussed loosening real estate control during the third quarter of this year which has improved economic expectations for the remainder of 2010. Some Chinese steel prices have started rising again in July, and iron ore buying interest returned in the last two weeks of July.

According to The Steel Index, specialist source of independent iron ore and steel price information, another reason for this development was that iron ore supplies have reached low levels at several steel mills. According to Clarkson Research Studies, shipments of iron ore during 2010 should reach 961 million metric tons, an increase of 6% compared to 2009. This trade is expected to be dominated by China which is expected to import 618.3 million metric tons in 2010, some 54% of the total margin.

In the meantime, China’s domestic iron ore production reached a new record of 101.5 million tons in June according to China’s National Bureau Statistics. This represented an increase of 22% from the same month last year. Iron ore stockpiles at Chinese ports were about 24 million metric tons, while steel mill stockpiles have been drawn down, resumed about 30 million metric tons during the last two months.

According to Maersk Broker, West Africa has become the new focal point for the iron ore industry. More than 20 potential projects have been developed there. It is estimated there are 400 million tons of annual potential projects in the pipeline, making the region one of the very few so far and best high quality reserves in the world.

By a company-by-company basis, Maritime Strategic International Limited are estimating that in 2010 Australia will export about 418 million metric tons of iron ore, Brazil about 317 million metric tons and India approximately 138 million metric tons.

Let’s turn to thermal coal. Clarkson’s predict that during 2010 the seaborne thermal coal trade will increase by 5% compared to 2009 and reach 622 million metric tons. Apparent European reluctance to import thermal coal due to stricter environmental regulation and due to safe effect around the middle of this decade, have affected the imports of thermal coals at several countries. Examples are Portugal, Spain and the UK where the combined steam coal demand is set to fall around 18.2% year-on-year.

Conversely, the continued expansion of India’s economy will be accompanied by increased energy growth which according to Clarkson is expected to be met largely by steam coal. Coal India the world’s largest producer of coal, mainly thermal, plans investing the first port terminal to handle imports. We have made the above mentioned increased demand for this fuel.

Coking coal now. Here the customs have prediction for the seaborne trade of coking coal is that it will reach 200 to 250 million metric tons, an increase of 17% compared to last year. Clarkson’s consider coking coal to continue to present one of the strongest growth stories, not only during 2010, but over the course of next decade as well.

New investments have been made in Australia, Canada, Indonesia and Mozambique in the expectations of ever increasing future demand. For the time being, Chinese imports of coking coal have not suffered the decline seen in Chinese imports of iron ore and thermal coal.

Looking at total coal exports, the largest exporters during 2010 are according to Maritime Strategy International, Australia was about 3,003 million metric tons followed closely by Indonesia at 250 million metric tons, with Russia in third place with 109 million metric tons.

Finally this year, we have seen for the first time Capesize shipments of coal from Columbia to China and other far eastern destinations. Up to now shipments were destined for Europe and the US, the benefit in terms of some high demand is obvious.

Grain trade; total imports of grain products are expected by Clarkson’s to increase 2% this forthcoming 2010-2011 season in comparison with the 2009-2010 season. As the new season begins, the early signs are encouraging. Furthermore, should concerns over the global prospects of it. Demand foreseeable in wheat could increase first. Demand for high grade wheat seems likely to grow in Europe, South America and Central America.

In terms of port congestion. I have mentioned earlier on, port congestion in both Panamax and Capesize ports dropped again in July even though shipping analysts expect a marked increase in vessel arrivals over the next couple of weeks, a potential early indicator of a recovery in iron ore demand. By the middle of July, we were about the 135 Capesize bulkers sized up in congested ports. Around worldwide, roughly 115 Panamax vessels remain caught up in congested ports.

Let’s look at scrapping. During 2009, about 2.2% of the world dry bulk fleet was scrapped. During 2010, Clarkson’s predict that about 2.3 million metric tons of Panamax vessels will be scrapped and the near 2.5 million metric tons of Capesize bulkers. The total trading fleet of Panamax’s at the end of 2010 is predicted to be around 138 million deadweight, while 210 million tons deadweight of Capes are expected to be trading at the end of the year. Therefore, the weak projections that serialized scrapping will not be able to be of much help in remedying any future oversupply problem in the dry bulk industry.

Let’s look at the supply side now. Looking at the order book during the last few quarters has been a rather scary exercise and unfortunately little has changed for the better in ‘10. About 60% of the existing bulk carrier fleet is unordered. We’ve got the order book for Capes standing at just under 81% of the existing fleet and for Panamax’s around 58%.

Clarkson’s estimate, that thus far this year the bulk carrier fleet has increased by 405 vessels of 37.6 million ton deadweight, net of scrapping losses and other reduction performance. This represents 8.2% of the existing fleet by deadweight. In bulk carrier fleet by the end of this year, is expected to be around 536 million tons deadweight, representing about 14% rise from the end of 2009.

Looking down by size, the Panamax fleet is expected to see a net increase of 8% while the Capes trading fleet would increase by as much 23% of the existing fleet. Even if we slash the remaining 2010 order book by 50%, the fleet of Capes will grow by about 20% this year. The VLOC, the Very Large One Carrier are a new player in the bulk carrier market and the fleet of just over 200,000 tons deadweight is scheduled to rise according to Fearnleys research by about 18% this year and 16% in 2011. Most, if not all of the investments will go into the Brazil, China iron ore trade and will seal a large part of the markets from the standard Capesize vessel.

If the Clarkson’s prediction of a 7% increase in dry bulk trading volumes materializes then the potential oversupply especially of Capesize bulk is quite obvious. Even if we make a generous allowance for slippage, take account of the inclusion of options, any new building statistics, that might never be exercised as well as of some double counting of shipyard slots, to take order book is daunting. The problem is compounded by the fact that most of these vessels are now in the order books of established and well capitalized shipyard, which tends to build them and sell these at the best price they can get.

What is more worrisome for the medium to long term, is that thus far in 2010 yards have accepted new orders for 417 bulk carriers for delivery from 2012 onwards. If this trend continues unabated, there is little doubt that eventually the dry bulk market will become flooded with tonnage, with insufficient new cargos to carry. To try and look into a crystal ball and predict the future has never been our favorite pastime here at Diana Shipping.

Instead, we collect market information and follow the argument presented by different shipping analysts and then choose that which of view appears to make more sense than direct.

Today, we wish to conclude this overview of dry bulk shipping by summarizing to you the views presented by Howe Robinson in their latest 10 annual review on dry bulk shipping.

Two years ago, after five years when aggregate demand exceeded cumulative supply, fleet growth accelerated and now looks like outpacing increases in demand. The freight market is now two years into this downturn and the distorting effects of the economic crash and then the recovery, have worked their way through the production and transportation chain. However, the new building book has not and is now effective size that it will continue to be the primary driver or grow the market direction over the next two years or so.

Looking back at previous shipping cycles, the turning point is only likely to come when rates reach sufficiently low level for a sufficiently long period of time to stimulate an aggressive scrapping program, and to put an end to short-term ordering. Until we arrive at that point, Howe Robinson argues, the markets will continue their longer term cyclical decline obviously with considerable seasonal and short-term volatility.

As mentioned earlier on, the macroeconomic environment remains very favorable indeed for dry bulk shipping. There is every reason to look for further sustained increases in the shipment of key bulk commodities and lower freight markets will themselves provide substantial emphasis to further trade growth. However, for the rest of 2010 and for the foreseeable future, freight growth will be constrained by the capacity of the world’s supply chain of iron ore and coal.

First half 2010 statistics show how the Panamax fleet has been hugely supported by the grain trade and also derived additional strength from the corporate, particularly in the Chinese coastal markets. However, statistics also show how fleet growth is poised to increase and that the mineral trades are under increasing stress from Capesize vessels.

Our Panamax fleet growth is into a very effective trade growth. Rates are expected to come under pressure, particularly as state competition intensifies. The supply/demand balance in the Panamax sector will continue to be more favorable than for the Capes, but the sector is unlikely to be insulated from the continuing cyclical decline, even though it will continue to be moderated by stronger seasonal influences than growth affecting the Cape factor.

As with the Cape, idle tonnage is likely to grow and provided rates are sufficiently low, scrapping will accelerate. This trend together with the reduction in the case of New building ordering will lay the ground for the next long term cyclical rise in rates.

This is the environment in which we at Diana have to make day-to-day operational decision and under the leadership of the company’s CEO plan our investment strategy going forward. We hope that the company’s track record has proven that thus far, we have to [improve] the policy of conservative expansion, maintaining a strong balance sheet and trying to take advantage of acquisition and employment opportunities for designing our fleet as they present themselves, which is exactly what we intend to continue doing.

I will now pass this call to our CFO, Andreas Michalopoulos, who will present to you second quarter and first half financial results for 2010. Thank you.

Andreas Michalopoulos

Thank you, Stacey, and good morning. I am pleased to be discussing today with you Diana’s operational results for the second quarter 2010, and six months ended June 30, 2010.

In April 2010, Diana Shipping Inc. invested $50 million in Diana Containership’s Inc. in a private offering and owns about 55% of its common stock. Diana Containership’s Inc. is being consolidated in the financial statements of Diana Shipping Inc. and the equity and financial results of minority interest are separately reflected in our financial statements.

Let me start with the second quarter of 2010. Net income for Diana Shipping Inc. for the second quarter of 2010 amounted to $33.9 million and the EPS of Diana Shipping amounted to $0.42.

Net income has been increased by $0.9 million of losses attributed to the minority shareholders of Diana Containership Inc. Mortgage and time charter revenues increased to $68.7 million, compared to $59.8 million in 2009. The increase is attributable to increased revenues due to the addition in our fleet of the motor vessels Houston in October 2009, Melite in January and New York in March 2010.

Ownership days were 2,003 for the second quarter 2010, compared to 1,729 in the same period of 2009. Fleet utilization was 99.7% in the second quarter of 2010, and 99.1% in 2009. The daily time charter equivalent rate for second quarter of 2010 was $33,105 compared to $33,073 for 2009. Mortgage expenses were $3.1 million for the quarter.

Operating expenses amounted to $12 million, an increase by 17%. The increase is attributable to the 16% increase in ownership days resulting from the delivery of vessels Houston, Melite, New York, and Sagitta, and increase in insurance with stores and spares. This increase was partially set off by decreased crew costs and repair.

Daily operating expenses were $6,006 for the second quarter of 2010, compared to $5,962 in 2009, representing an increase of 1%. Depreciation and amortization of deferred charges amounted to $12.9 million for the second quarter of 2010.

General and administrative expenses increased by $2.6 million or 62% for the second quarter of 2010 to $6.8 million compared to $4.2 million in 2009. The increase was mainly attributable to increase in salary, compensation costs, unrestricted stocks, legal and audit fees, office rent, BOD fees and brokerage fees.

The interest in finance costs increased by $0.3 million to $1.2 million for the quarter, compared to $0.9 million in 2009. This increase was attributable to increased average debt during the second quarter of 2010 compared to 2009.

Six months ended June 30, 2010 now. Net income for Diana Shipping Inc. for the six months ended June 30th, 2010, amounted to $62.7 million and EPS of Diana Shipping amounted to $0.78.

Net income for this period has been increased with losses attributed to minority interest amounting $2.9 million.

Voyage and time charter revenues for the six months ended June 30th, 2010, increased to $130.9 million, compared to $122.5 million in 2009. The increase is attributable to the addition in our fleet of the motor vessels Houston and, Melite and New York and was partly offset by the decreased average higher rates during the six months ended June 30th, 2010, compared to the same period of 2009.

Ownership days were 3,897 for the six months ended June 30th, 2010, compared to 3,439 in the same period of 2009. Fleet utilization was 99.7% in the six months ended June 30, 2010 and 98.5% in 2009.

The daily time chart of improvement and rates for the six months ended June 30, 2010 was $32,560 compared to $33,983 for 2009, voyage expenses was $5.5 million for the quarter, operating expenses amounted to $24.5 million, an increase by 24%. The increase is attributable to the 13% increase in ownership days resulting from the delivery of our vessels in Houston, Melite and New York and Sagitta and increasing stores, spares and repair.

Daily operating expenses were $6,297 for the six months ended June 30, 2010 compared to $5,743 in 2009 representing a 10% increase. Depreciation and amortization of deferred charges amounted to $25 million for the six months ended June 30, 2010. General and administrative expenses increased by $3.6 million or 43% for the six months ended June 30, 2010 to $11.9 million compared to $8.3 million in 2009.

The increase was mainly attributable to increases in salaries, compensation costs, unrestricted stocks, executive and BOD fees, office rent, audit and brokerage fee. Interest and finance costs increased by $0.6 million to $2.3 million for the six months ended June 30, 2010 compared to $1.7 million in 2009. This increase was attributable through increased average debt during the six months ended June 30, 2010 compared to 2009.

Thank you for your attention. We would be pleased to respond to your questions and we now turn the call to the operator who will instruct you as to the procedure for asking questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. We will now be conducting the question-and-answer session. (Operator Instructions). Thank you. Our first question today is from the line of Jon Chappell with JPMorgan. Please proceed with your question.

Jon Chappell - JPMorgan

Stacey you gave a pretty good, detailed overview of the dry bulk industry, but really no talk about containers, which seems to be the industry that you are investing in now. As you look at investments over the next 18 months, given your balance sheet strength, how do you see the balance between the timing of dry bulk investments versus container investments at current asset prices and given your outlooks on the market?

Anastasios Margaronis

Well, we have to first differentiate Diana Container Ships which is a private company as you know for the time being at least and Diana Shipping Inc., the program in Diana Shipping Inc, which we have repeatedly stated in the past came to discover the acquisitions through the later stages of the down cycle which is what we believe where we are going through now and the investment in Diana’s Container Ships by Diana Shipping Inc. has not changed that program. So it would be inaccurately guiding you by saying that we are focusing our attention now in the acquisition of container ships to the decrement of looking to acquire attractive bulk carriers.

Truth be told, if rate market remains at or near the level that it is now. At Capesize, you don’t look particularly attractive, but that’s something that you don’t need us to point out to you, the calculations and the returns are quite obvious. Panamax has remained roughly as attractive as they have been recently because they suffered less in the downturn than the Capes. So there is possibly an attitude over waiting a little bit to see where values will stabilize in the bulk carrier sector; but on the container sector, the story is rather different because we are at a completely different point in the cycle.

Now, this is where you have to allow me to stop talking about conditions. A private company nature does not allow us to publicly disclose the information that you have requested has been signed and therefore, we would like to avoid certain details as to the acquisition program but I want to say it again, that we are not neglecting the investment strategy that we have declared again to follow as a policy in Diana Shipping Inc.

Jon Chappell - JPMorgan

Okay. Fair enough. So then just to dig a little deeper on the timing of the dry bulk, it seems that the asset prices have held up pretty well. As you mentioned before, there has still been a surprisingly large amount of orders this year, which has to show some type of optimism in certain owner sentiment. And assuming a much longer lag, it looks like the opportunities may be pushed out further into the future because of that optimism. As you look at your balance sheet, I know you just announced the buyback, and any update on the progress of that would be appreciated as well. It doesn’t seem to me like acquisitions and some type of return to shareholders in the form of dividends would be mutually exclusive. Have you changed your opinion given the fact that maybe the acquisition timetable has been pushed out a little bit maybe balancing income with growth as you look over the next couple years?

Ioannis Zafirakis

Jonathan, this is Ioannis. We have no doubt we have said that during the conference calls stop that acquisition program, we are going to continue to do that for the next 18 months, we are going to keep buying vessels in a staggered manner as we explained. So we’re still feel that even at this environment, today’s environment where we can purchase dry bulk vessels. As we explained in a staggered manner, we feel that we should not amend our strategy which has a hedging nature based on short-term events. And secondly, we cannot as we have said [rate] to find the absolute bottom of the market before we do anything. So we will continue our strategy meaning that dividend is something that we two are not considering at this moment in time.

Jon Chappell - JPMorgan

Okay.

Simeon Palios

Jon, if I may add, I think Stacey was very explicit on the supply and demand situation and I think he explained it as you said also very explicitly. We believe our company is very well positioned in our industry space with a strong balance sheet and a predictable contracted cash flow which is very important too. Therefore, prepare to take advantage of opportunities that may arise in this situation. So that’s the key point that we are prepared to take advantage of what we have in front of us

Jon Chappell - JPMorgan

Understood. I just have one more for Andreas. You mentioned a lot of the factors that drove the G&A higher both sequentially and year-over-year in the second quarter. It didn’t seem to me like many of those factors would be considered one-time in nature. What type of run rate should we be looking for, for the G&A in the back half of this year? Would it be closer to the first-quarter levels or the second quarter?

Andreas Michalopoulos

You have to take into consideration I’m more close to the second quarter numbers and one of the reasons is the fact that in the second quarter as you understand at the moment Diana Containerships Inc, as we said in the first quarter this financial result is pretty consolidated with Diana Shipping Inc. numbers and therefore part of the G&A are also related to Diana Containerships Inc., setting up fees et cetera and run rates. So I’m feeling that Diana Containerships Inc. is consolidated in Diana Shipping Inc., I would rather go with the second set of numbers i.e. to the second quarter numbers more than the first quarter numbers.

The other thing that you were mentioning in there is also some office rent that has increased that was foreseeable and that will remain that way. We have increased our personnel due to the increased fleet. And therefore increased the office space and so we have also increased office rent there.

Operator

Our next question is from the line of Justin Yagerman with Deutsche Bank. Please proceed with your question.

Joshua Katzeff - Deutsche Bank

It’s Joshua Katzeff on for Justin. Good morning. Just a couple of quick follow-up questions. With regard to, I guess a lot of owners and analysts thinking that spot rates are going to be materially stronger in Q4. Is there any chance we’ll see increased spot exposure in Q4? I know once the 2010 is covered, but you have 30% of the fleet potentially open for the remainder of the year.

Andreas Michalopoulos

As you can see, about 70% of the fleet is fixed for 2011. The spot exposure is something that we have tried to explain to our shareholders many times. We are having a spot exposure as long as we have a vessel to fix every now and then. And this is what we continue doing at the moment.

So basically, the only spot exposure that you are going to fleet of Diana is to having to fix a vessel every month or so, in 2011 basically. And we are prepared to accept a lower rate, in case the market goes out in 2011, and this is the reason why we have fixed the remaining 75% of the company. Again, there we have a hedging strategy that we should not deviate from and this is why we should keep it like this and not get influenced by short-term event.

As our President said, Mr. Margaronis, we are very cautious about the market, but we are not here to change everything and fix all of our vessel for the next five years because of that. We have to stick to our set strategy in chartering.

Joshua Katzeff - Deutsche Bank

And probably going back to acquisitions, is there any thought to expanding to different sizes or currently we see some large acquisitions in the Supramaxes and handy side space, a sector you have no real exposure to, is there any thought about expanding there?

Simeon Palios

I think we have said all along, that we will be focusing on Panamax's and Capes, maybe we will go to the Newcastlemax, which are little bigger than the Capes they are in excess of 200,000 tons. But we do not intend to go to the Supramaxes for the time being.

Joshua Katzeff - Deutsche Bank

And just one final question, just given your kind of and the industry’s concern on the order book, is there any concern on the ordering spree we saw a month or so ago, a couple of months ago, the Kamsarmax and Panamax space?

Anastasios Margaronis

Well there is a concern about all sorts of ordering that has been happening. There is no doubt that Kamsarmax have been the favorite of people ordering in the Panamax side and also be larger than Kamsarmax vessel the 92,000 - 93,000 tons. But, these are unfortunately detailed if I can call them and should not detract us from the overall overcapacity which appears to be looming there in the future for the dry bulk market.

In other words, we cannot envisage a situation where because there are too many Kamsarmax's on order the Panamax's would be doing significantly better than their larger area sectors in the Kamsarmax side.

So any over ordering unfortunately is bad for the future of the freight market and presupposes that we need even higher increases in demand for the transportation of the cargo that these ships carry, in order to maintain and let alone have higher rate on a medium to long term basis.

I am excluding as we said earlier seasonal variations of rate which can come about because of the grain season, the harvest because like now in Russia we are going to have a particularly poor harvest, we are going to have few exports from there and we assume we are going to get export from places which are further away, than consumption which might be good.

So excluding those short term phenomenon which lasts about a quarter maybe two, there is going to be a over tonnage in there in the Kamsarmax and Panamax market and some of the mineral trade that these ships are serving are going to be sold and unfortunately by Capes which will be definitely looking for tonnage of any kind in order to keep employment going.

Operator

Thank you, our next question is coming from the line of Gregory Lewis with Credit Suisse Group. Please proceed with your question.

Gregory Lewis - Credit Suisse Group

Stacey, I know you commented that you not really going to talk about the container ship segment of the business. But when I look at I guess the press release and you sort of give your fleet detail, are we going to see the containerships consolidated in those numbers in terms of vessel operating expenses and then time charter equivalent rates?

Anastasios Margaronis

They are already consolidated. Actually motor vessel Sagitta was delivered on the 29 of June, so a few days before the end of the quarter. So they are already consolidated. We can say, we must tell you that after the next quarter and according to SASB, accounting requirements. Those numbers will be consolidated, but there will be a separate note in the press release, explaining the nature of the numbers.

So you will be able to build up a model based on that. It was not done for this quarter, because the first vector was delivered only at the very end of the quarter, so the numbers in terms of revenues were not far from material; there were only two days revenue. So yes, it will be consolidated as it is already in the G&A, they are breaking expenses revenues. And you will have the minority interest shown, reflected in the financial statements and shown on a separate line as you can see them now.

Gregory Lewis - Credit Suisse Group

So are we going to have to wait until Q3 to see if there has been any debt applied on the two containerships that were purchased?

Anastasios Margaronis

Yes and you will have to wait.

Andreas Michalopoulos

Of course you will have to wait until Q3 and so, but this also we get advice [Multiple Speaker] on what we are allowed and not allowed to say as it is a private company Diana Containerships Inc. as Mr. Margaronis said. So, unfortunately I wish we could take much more but we can’t.

Gregory Lewis - Credit Suisse Group

Is it safe to assume that it’s probably in terms of how vessels are typically financed?

Anastasios Margaronis

Yes it is safe to assume that and if it is safe to assume that, if you know the prices of the vessel, you know how much money we had, you take to assume that probably there will be a loan associated to those vessels.

Gregory Lewis - Credit Suisse Group

Okay, perfect. And then just one last quick follow-up question. A few weeks ago when the Cape market collapsed, there had been some speculation that maybe more than a few Capes might have been idled, temporarily removed from the fleet. I guess could you comment on whether you saw that actually happening? Not with your vessels because they are on contracts; but in the spot market and if it did happen, is it still going on today?

Simeon Palios

Well I think it was said and it was written that a particular owner had made up some tapes and I presume those tapes are still laid up.

Operator

Thank you. Our next question is from the line of Fotis Giannakoulis with Morgan Stanley. Please proceed with your question.

Fotis Giannakoulis - Morgan Stanley

I would like to ask you regarding the steel movements, if you have seen any changes during the last few weeks, and what is your outlook for the iron ore trade. A lot of people were very pessimistic couple of months ago, but seems there are some positive signs. Have you seen them in the trade of your vessels?

Anastasios Margaronis

No, I don’t think Fotis, hi. The trade of our vessel is representative to any extent of the sentiment that prevails in the steel or iron ore trade because of the nature of their employment and the pattern of their time charter contract.

The thing that we have to admit is that on steel prices and you can see that as well from various reports; there is optimism that we dropping the prices has reversed itself. There is a genuine willingness it seems by the government in China to start again encouraging the building of social housing and cities near where the rural population is as opposed now just in the coastal areas.

And this creates a social problem; this has been well publicized in popular press. But the government is pushing on with those projects and this has triggered, has acted as a catalyst, optimism as regards the price of steel and this I feel over of course into the iron ore trade, especially if we take into account the running down of the iron ore stockpiles in the steel mill themselves.

Before becoming too enthusiastic of course we have to keep in mind that the iron ore stockpiles in the major ports in China, are around to 74 million to 75 million tons as of last count. And this means that we have plenty of iron ore to be moved to steel mills if there is a genuine long-lasting increase in the demand for iron ore. So we’re not running out of raw material by any stretch of the imagination, but there is a more positive now sentiment as regard to the next couple of quarters for the price of steel, the price of iron ore and the volume of both iron ore and coke and coal shipments.

Fotis Giannakoulis - Morgan Stanley

Can you also comment? About a week ago Vale reported a sharp increase in the number of vessels that they have scheduled during the next 30 days to reach Brazilian ports. Can you comment on that? Have you seen any pickup in activity or in inquiries from charterers regarding Capesize vessels?

Anastasios Margaronis

While there are certainly more inquiries and there has been inquires and they have seen a month before, but we haven’t seen a flood of charterers trying to in the face of panic secure tonnage because there is plenty of tonnage around to secure.

Fotis Giannakoulis - Morgan Stanley

My last question is, you have mentioned in previous presentations that you have been conservative for the last couple of years and you have ridden the crisis very successfully. But you have also mentioned in previous presentations that if the scenario of a sharp decrease in asset prices does not materialize by the end of the year, you might reconsider your strategy of investing. What are the signals that you are expecting to see? What would be a confirmation of your current strategy, or the signal that will lead you to move to a different direction?

Anastasios Margaronis

When we are working, we said that we are going to change the invest strategy. We said that we might reconsider our views about the future trend of asset values and the ability of the markets to absorb the new building tonnage and we set the end of the year as a tentative sort of mark time-wise purely because we believe that 2010 will actually see, will be the first year since for a long time that we have actually seen a huge number of ships being added to the market.

So the rationale is quite simple, there is nothing too complicated about it. If the markets succeeds in absorbing about 75 million to 80 million tons of dry bulk carriers without huge problems and we see that at the end of the year, very early next year.

And then we look at the change completely, our investment strategy but our ideas about the prices of ships and where they will be going over the next few quarters might be adjusted upwards obviously.

Fotis Giannakoulis - Morgan Stanley

Does that mean that the ships can be considered expensive if they move even higher? Or it means that the prices will not drop, so it’s a good investment opportunity? I am trying to ask and related to potentially dividends or investments.

Andreas Michalopoulos

What we have said in the past is, if we see that we have entered the upper part of our business cycle, we see vessels earning thousands and thousands of dollars as we have seen in 2006 and 2007 or even before that. Then we will certainly adjust the investment policy and start paying dividends again and raising more equity, bringing down the debt level that we will have that in moment and then so on and so forth. But we feel that we are very far away from that scenario still, Fotis.

Operator

Our next question is from the line of Doug Mavrinac with Jefferies & Co.

Doug Mavrinac - Jefferies & Co.

I just had a few market questions. Capesize rates as we have seen have really come off here over the last couple of months. I think everyone acknowledges that is primarily due to a decrease in Chinese iron ore demand. However, my question is over time, Capes rates are generally twice as high as Panamax rates, for example. And obviously right now they are well below Panamax rates and have been for the last couple months. Is there something structural taking place that would cause such a disconnect away from that historical correlation and that may cause us to have to think about the individual asset classes a little bit different going forward than we have historically?

Simeon Palios

It’s not the first time that this has happened on the Panamax’s and on the Capes. We have seen it before, so this is a matter of how much the merchants want to buy and whether the smaller stents there are supposed to be bigger stents. So it’s nothing that we have seen this for the first time. We have seen several times that the rates on the Capes are of less than the rates on the Panamax’s rates.

Anastasios Margaronis

In other words there is nothing structural happening. We’ve seen something that has resulted, as you said very correctly earlier, but a drop in the iron ore imports to the Far East and the continuous flood of new buildings.

Doug Mavrinac - Jefferies & Co.

Okay thanks.

Simeon Palios

(Inaudible) on the short-terms not on the long-terms. Of course.

Doug Mavrinac - Jefferies & Co.

Yes, that is what it seems as though, it sounds as though it may be just on a longer term perspective we should see that correlation return, and this just may be a smoothing-out event.

Simeon Palios

Indeed.

Doug Mavrinac - Jefferies & Co.

Then my second question relates to, I guess Stacey, some of your comments in terms of the expectations for the order book. And as you mentioned, even if we see a 40% to 50% shortfall on the actual number of ships being delivered, it is still a big number. My question is in terms of potential surprises to that number and the impact to the market. How do you expect the existing port infrastructure to accommodate all those ships, even if it is a 40% or 50% shortfall to the order book? Is there a scenario that plays out that the port infrastructure doesn’t keep up with all the ships being delivered, and therefore you just have these new ships just piling up and adding to an already congested market whenever demand does come back?

Simeon Palios

Yes, I mean that’s a point that has been made implicitly by Howe Robinson in their report is that even if the world demand for the volumes that these ships require, the new building ships which will be added to the fleet, required to be kept busy. We’re going to have problems not only at the discharging ports but primarily in the loading ports, because simply the cargoes will not be there for the ships to be loading. So, it’s one thing if you get a ship which is laden, queuing up to discharge, and another thing when the charterer knows that when his ship goes to the loading port, there will simply be no cargo.

The second is beneficial for the trade market as we have witnessed in the past. The second phenomena is not unfortunately, its detrimental because this means that the less attractive unit as usually happens, not the new buildings, are going to be left un-chartered, not because the Chinese or the Asian, European or American markets do not wish to have those commodity shipped, but simply because there will not be enough of the commodities themselves to be loaded to the ships, to be moved to the discharging port.

Operator

Thank you. Our next question is coming from the line of Rob McKenzie with FBR Capital Markets. Please proceed with your question. Mr. McKenzie your line is open for a question. Thank you. Our next question is from the line of George Pickral with Stephens Incorporated. Please proceed with your question.

George Pickral - Stephens Inc.

Question on the order book, when you look at the new orders that we’ve gotten over the past year, are these more from existing ship owners and existing dry bulk companies? Are you starting to see any sort of speculative buying in the market?

Simeon Palios

I think we have seen speculative buying too, even for new orders, yes.

George Pickral - Stephens Inc.

So my follow-up question to that would be, and maybe this is a Capesize-specific question. But, given where rates are, given the order book, and given where we are in the cycle, do you foresee a situation developing and maybe your crystal ball here would be nice maybe in the next year or next two years where you could start to see some of these companies failing that maybe bought near the top and now can’t get the rates to justify the interest expense?

Simeon Palios

Yes, on the spec that you have purchases was mainly on the Capes not on the Panamax’s. On the Capes, we do not have people who are speculative buyers, we have more speculative buyers on the Kamsarmax and from the Panamax. And yes I think that we are going to have a problem in the long run for the people who are speculatively investing in those ships. But, mainly on the Kamsarmax’s and from the Panamax.

George Pickral - Stephens Inc.

But nothing imminent? Nothing say in the next year, where you could start to see some of these speculative buyers failing?

Simeon Palios

Well I will question whether they will be in a position to fulfill the orders. When, they are there to be delivered.

Anastasios Margaronis

The problem is that they might disappear and unfortunately we have seen a number of original contracting buyers disappear, but yards have the tendency of building the ships and trying to find somebody else to buy them. So unfortunately the financial demise with speculative buyer is not much comfort to us, as regard to the supply/demand equilibrium, as long as the yard decides to build the ship and either sell it to a local buyer, say a Chinese owner or to a foreign buyer with enough of liquidity which he has gathered through the last five years of good market.

Operator

Thank you. We have reached the end of our allotted time for question-and-answer session. I would like to turn the floor back over to management for closing comments.

Simeon Palios

Thank you again for your interest in and support of Diana Shipping. We remain sharply focused on delivering shareholder value and we look forward to speaking with you next quarter. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Diana Shipping Inc. Q2 2010 Earnings Call Transcript
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