Four Shipping Stocks To Ride The Dry Commodities Boom

Transportation costs – and can cost a lot. We all know this. We even feel it personally as we shell out that $40, $50, or dare we say $60 for a full tank at the corner service station. We also feel it in the cost of the things we buy – like food and consumer goods – and since Star Trek's transporter is a long way from being a reality, that stuff has got to get from the farm, mine or manufacturer somehow. For coal and iron ore it's by ship.

Recently, the cost of hiring that ship has been rising. And it's not only due to increased operating costs (think fuel). The large capesize ships can carry 175,000 tonne of coal or iron-ore, and China has been using them at record levels. Here's what happened: India, China's closest iron-ore exporter, introduced a new tax on iron-ore exports, leading China to look farther afield for cheaper supplies. These supplies have to be brought in by ship longer distances which has reduced the number of ships available for hire. Once again the laws of supply and demand spring into action and transportation costs rise. They've risen so much that industry officials say that “freight [is] almost expensive as the ore itself”.

It's not just coal and iron ore that are effected. With the tight supply of capesize ships, the mid-sized “panamax vessels” are experiencing an increase in demand and their prices have risen too. This trickle down effect could raise prices all down the line, bumping up everything from rice to soybeans. And with China being one of the largest importer of soybeans, we all know which way the ships are headed.

Once the ships get to where they're going, the goods have to be unloaded, which brings us to another problem. In some places in southern China, there simply aren't enough berths for the ships to dock. When the ship is finally able to dock, the railway and ground transportation infrastructure is insufficient and even more bottlenecks have to be navigated. All these things combine to delay off-loading and reloading of the ships, keeping the ships out of service for the rest of the world.

All of this supports higher commodity prices – great when you're investing in the commodity, not so great when you're shelling out more money for that edamame. It also points out once again that commodities are driven by far more than one factor. In this case, the neo-longshoreman, bad dock management, insufficient railway maintenance and short-sighted Indian protectionism are driving the price of, say, veggie burgers.

Go figure.

So, how do we get in on this? Ever thought of owning a boat? Don't want the headaches? There's always Frontline Ltd (FRO), Diana Shipping Inc. (DSX), Eagle Bulk Shipping (EGLE) and Euroseas Ltd. (ESEA). They are all in the business of shipping iron ore, coal and other dry commodities and have some of the higher dividend yields in the industry – or frankly any industry. In fact, Frontline Ltd. Reports a dividend yield over 19%. Of course, if you are a commodity investor, buying a high yield old-money shipping company stock is the equivalent of buying your teenager a “dependable” car: a great idea on paper, but really quite boring to those concerned. Still, it's something to consider.

The other factor to consider here is the continuing effect of the China/Commodity axis. With China, we have for the first time in history an extremely high growth market that's already fully industrialized. The factories, the manufacturing knowhow, the intellectual property, the training – these have been in place in China for decades. But now as growth is taking root internally, not just in exporting, the markets find themselves faces with what amounts to a bottomless buyer. It's easy to imagine a Ross Perot-like giant sucking sound coming from across the pacific, as China's appetite for raw goods gets stronger and stronger. The cost of getting these raw goods into the local market seems the limiting factor, not the capacity to use them.

The other little take away lesson from all this? Pay attention to this article from 2003 – those building blocks of humanity that we all like trade – coal, iron ore, soybeans, wheat, etc. -- they all are traveling this global economy in ships. As the article says, “People don't book freighters unless they have cargo to move.”

Comments

[Graig Stettner:]

I think it's critical that one also consider the potential supply of ships, especially as it relates to China, which is beginning a big ship-building program. It may be a ways off, but markets have a good habit of discounting such future events. Check out this link to "China begins expanding its supertanker fleet": www.iht.com/articles/2...

2007 May 25 08:58 AM

[sal milazzo:]

another favorite: GNK

2007 May 25 11:24 AM

[bruc2y:]

You are too late. Those of us that have been in the shipping stocks for the last four or more years know the fleet growth is outstripping the demand rapidly at this point. Look at the long term chart for WS spot rates, look at the FAA market (futures). Read the IV (www1.investorvillage.c...;pt=m)message board for FRO and get a good understanding of this industry. To quote one insider, working for a well-known shipping broker, "The valuations in the tanker stocks are astonishing, when the market is now, finally, on the cusp of the tonnage supply story manifesting itself, after passing through the 2002-inspired pause in deliveries in 2006. "

There is no substitute for doing your own research.

2007 May 29 11:02 PM

[Gekko:]

Dont't forget the role thee American dollar plays in the market's low dollar value + demand=increased prices across the board.

2008 Apr 21 04:18 PM

[ATsunamiSurfer:]

Treasury Secratary Hank Paulson (former Goldman Head) & FED Chairman's (now: Uncle Bernie Clause) "emergency" scare tactics convinced Congress that the Global Financial System was in a Crisis, created when capitalism gave way to socialism (new Dictator Designate: OBAMA) where gov't burocrats pick and choose which financial companies including hedge funds & banks become anointed by gov't to succeed and/or even survive...

The supposed "POCKET BAZOOKA" that supposedly wouldn't need to be taken out to instill "confidence", was, resulting in A HUGE MULTI-TRILLION$ BLANK CHECK, called "TARP", which Hank conveniently gave mega-billion$ to his top banking buddies, then conveniently folded up and took home with him, in something like a bad Charlie Brown re-run where Lucy took the Football home, sadly ending the game. A classic "Bait and Switch" routine, where Hank folded up his TARP, and took it home with him to do as he pleases with his top banking buddies, who incidentally haven't been doing much lending, but instead shored up their balance sheets for the coming wave of bank failures where they will be in a STRONG position to buy up failing institutions for pennies.

The Designated Dictator (aka President Elect) of the new United Socialists of America, is also using the same scare tactics, proposing that government has to save everyone. What will be the result of all the scare tactics, with unprecedented powers in the hands of very few at the top, supposedly requiring Cranking up the PRINTING PRE$$E$??

History shows that it always ends up in a flood of Fiat Currency being soon destroyed in ensuing HYPER INFLATION, banana republic style.

The upcoming COMMODITY BOOM will soon SURGE far beyond the temporary "Commodity Bubble" spike that supposedly "bursted" last summer. OIL PRICES affect the price of almost everything manufactured and distributed in the interconnected Global Economy. OIL PRICES are currently very low, but can not possibly stay low for very long, regardless of so called "DEMAND DESTRUCTION", which will soon give way to DOLLAR DESTRUCTION via HYPER-INFLATION of the Fiat Flood and new Credit Creation at the Top Level (FED), pumping imaginary USD into Central Banks worldwide, to thaw the credit freeze... How do you solve a Global Credit Crisis?? The apparent answer is to Create a FRESH NEW MOUNTAIN of CREDIT$!!!

OIL is traded in USD globally. OIL and other hard/soft commodities trade inverse of the USD Index, which for now has been riding high.

What will happen when the inevitable inflation catches up with the flood of new Credit Creation and US Paper Debt Instruments... Fresh USD & the sale of ever escalating US Treasury Debt?? Intrest on Treasury Notes has been extremely and Historically low lately, if it exists at all, in the rush to historic SAFETY of US Treasury Debt Notes... But when the TREASURY BOND BUBBLE BURSTS due to inflation returning less than the original buying power invested in it, there will be a race to anything else, such as COMMODITIES of INTRINSIC VALUE, & REAL MONEY... GOLD & SILVER (which is incidentally in historically low supply now).

Yes, Shipping Companies will make big profits in the very near future, as they ship the commodities needed for survival, regardless of their prices. Of course, the price of the OIL/fuel needed to ship the commodities will be passed along to the end purchasers/users.

So, which SHIPPING COMPANIES will profit the most in the near future and thereafter?? The ones with a huge pile of long-term contracts already in place. Which STOCKS will surge the most in the very near term?? Companies with extremely low current and forward P/E ratios...

That's why I like DRY SHIPPING (DRYS)... Their stock surged again today, even though some government talking heads have been talking on TV again... DRYS will likely surge back up to and above levels it was trading at less than a year ago, and FAST!!!

Of Course, with all that freshly printed money being dedicated to the new "Stimulous Plan", OIL, Alternative Energy, & Mining Stocks, as well as Agriculture Stocks including Fertilizer (POT & MOS), especially those trading at low P/E ratios, will $urge very soon. I especially like Silver Mining Stocks (due to the quiet Silver Shortage and manipulation of Spot Prices from naked shorts on the COMEX, which may default very soon): SLW & SSRI, both of which are sitting on HUGE STASHES of SILVER, just waiting for the inevitable SURGE as the masses rush away from Debt instruments of paper "MONEY", to the SAFETY of REAL MONEY and INTRINSIC VALUE of COMMODITIES essential to daily living, all of which have to be transported somehow in a Global Economy, primarily by SHIPPING!!!

One thing is certain... Increasing overall VOLATILITY is the new norm...

Beware of so called "Expert" Analysts, & do your own investigating...

Happy Investing!!!

PS: Speaking of Shipping... What if Pure Liquid Gold, Abundant PETROLEUM, was to be found in ISRAEL, (far away from Dire Straight of Hormuz Persian Gulf bottleneck surrounded by Iran) in the Jezreel/Kishon River Valley, right by the Mediterranean Sea ports, as per Ancient Prophecies?? (((in and around MEGIDDO)))

The Geopolitical landscape and balance of power in the Middle East & World would change suddenly & shockingly change immediately!!! The exploration & rightsholder company, ZION OIL, is not my own, although my family does own significant stock & warrants in Zion OIL (Amex:ZN).

Jan 09 12:50 PM