Four Shipping Stocks To Ride The Dry Commodities Boom

Includes: DSX, EGLE, FRO
by: Hard Assets Investor

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 (NYSE:FRO), Diana Shipping Inc. (NYSE:DSX), Eagle Bulk Shipping (NASDAQ:EGLE) and Euroseas Ltd. (NASDAQ: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.”