Short Industrial Commodities, Avoid Global Shippers as China Crashes

by: Glen Bradford

Greece wouldn't be in so much trouble if it weren't for the oversupply of shipping capacity and the overcapacity of shipbuilding production -- on a global scale. China has an insatiable appetite for acquiring more industrial commodities than it can put to use using a positive ROI framework. While China was able to get away with fudging numbers in 2008, electricity usage shows what the real story is and while China may publicly promote the "soft landing" story, I'd note that things are likely heading for a global slump later this year, as excess debt is deflationary and I think we'll be seeing that on a global scale ex-global-monetary-stimulus. The net result of this is that although the shipping industry looks cheap, it is reasonable to expect things to get cheaper due to overcapacity and oversupply throughout the industry.

Vale's (NYSE:VALE) fleet of VLOC's is theoretically going to slash its shipping costs to China, but when the volume of raw material going to China gets cut because demand isn't sustainable, you end up in a situation where the company has been making decisions anticipating only "the best of times." Large shorts like Jim Chanos have taken note of this and are happily taking the other side, anticipating that things are not as good as they seem.

All of the shipping companies-- DryShips (NASDAQ: DRYS), Frontline (NYSE: FRO), Diana Shipping (NYSE: DSX), FreSeas (NASDAQ: FREE), Seanergy Maritime Holdings (NASDAQ: SHIP), Star Bulk Carriers (NASDAQ: SBLK), and Paragon Shipping (NYSE: PRGN), just to name a few -- all look relatively cheap in comparison to the rest of the market given what you'd expect their cash flows to be if China continues to be the growth miracle of this century.

China -- a miracle it is not. The global economy is not as sustainable as the politicians would blindly lead you to believe. There are lots of programs that have been making unsustainable loans and unsustainable profits. Shorting industrial commodities and staying out of the Global Shipping Industry during this downturn is an excellent way to preserve wealth, as I anticipate that although China may outwardly profess that things are business as usual -- we will be able to tell what is really going on behind the great red curtain simply by keeping an eye on Global Shipping and Industrial Commodities. The momentum has been picking up for the last 2 months since things started breaking down.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.