Dry Bulk Shippers In The Doldrums

by: Tony Daltorio

Dry bulk shipping companies continued to be tossed about in stormy seas ... The "storm" raging is one that has been brought about largely by a surge in new year ship deliveries. The earnings of the dry bulk shippers overall slumped by 35% (as measured by the Baltic Dry Index) last month, raising questions about the financial health of many companies in the industry.

Capesize ships – large vessels that carry only coal and iron ore – have seen the biggest falls. The Baltic Exchange's Capesize Index has plummeted more than 43% since December 12, 2011. The decline has brought average capesize charter rates down from $32,889 on December 12 to a recent rate of $13,386. This is below many shipping firms' total operating and financial costs.

Many shippers including Paragon Shipping (PRGN) have said that 2012 has long been expected to be a difficult year because of the volume of new ships expected to be delivered. Surging ship deliveries – which some ship brokers put at one capesize ship a day in January – is sinking the fortunes of dry bulk shipping firms. There are traditionally more deliveries of ships – whose value drops with age – early in the year rather than later. Adding to their woes, at least temporarily, is a slowing in demand for key commodities such as coal and iron ore.

This is unlike 2011. Last year saw strong commodities demand keeping many ship owners in the black for the year. This is in spite of an increase in the second half of 2011 of nearly 13.5% in ship capacity. Iron ore shipments from Brazil and Australia in December, for example, had been running at record rates. Shipments are now falling, however, in part because of the early start of the Chinese New Year (January 23) this year. So later in 2012 conditions will improve relatively in the industry. There will be few fewer ship deliveries and an increase in certain key commodities from current demand level.

But that does not mean all is well for the dry bulk shipping industry. Overall ship capacity in the industry is expected to grow by about 7.4% this year according to Oslo-based Arctic Securities. Meanwhile Arctic Securities expects demand for bulk commodities to rise by only 5.3% in 2012.

This is an obvious deterioration in the supply-demand balance in the industry and not good news for companies like Paragon, DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX) and Navios Maritime Partners (NYSE:NMM) among others.

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