A Rising Tide Lifts Bulk Shippers

Nobu Su, the CEO of Taiwan Maritime Transport, on December 2, 2007, complained that dry bulk charter rates were "insane" and "unsustainable". Normally you'd wonder why the head of a privately owned company with 130 ships like TMT would lament about getting high rates for his vessels. Doesn't make a lot of sense, does it? Why would the CEO of a big ship company do that? This is a really smart guy. He's not only CEO of TMT but Co-chairman of Star Bulk Carriers (SBLK).

It does make sense if you know that he has allegedly been heavily betting in the future market against the Baltic Dry Index [BDI], an index that compiles the current dry bulk shipping rates over a wide weries of international shipping lanes. Apparently, according to the Financial Times, Mr. Su started chartering his vessels at substantially below market rates to drive down the BDI. Over two months, the BDI and, with it daily charter rates, dropped precipitously. The BDI fell from over 11000 to about 5400 in just about two months.

On January 23, the Financial Times broke the story (see additional articles on FT). The same day, Su resigned as Co-chairman of Star Bulk Carriers due to "too heavy a work load." George Economou, the CEO of Dryships (Drys) commented that one man had "shaped" the market.

See BDI chart from Capital Link Shipping.

Now, it's hard to drive down a big market like dry bulk shipping. After all, there are about 6500 dry bulk ships out there. Even a large shipper like TMT has only 130.

Granted there are other factors at work: ongoing iron negotiations with steel makers and iron miners (soon to be resolved, I think), possible improvement in port congestion (not much better), new ships in the market (not enough). But it is interesting to see the start of an upturn in the BDI soon after the story broke. The BDI is now up to 6134, after a relentless stomach-in-your-throat drop. The shippers are rising quickly and deservedly: DRYS from 52 to 74 and 36 to 50 in two weeks. As Economou says, you can charter a cape for $90,000 a day with a $6,000 a day expense. Now that's a tidy profit.

I expect the DBI to continue to shoot up after being held down. Like with a rising tide that lifts all boats, I expect the dry bulk shipping stocks to go much higher.

Disclosure: Long DRYS, GNK, SBLK

Comments

[tessant:]

drys has a PE of 3...give me a break guys...

scott w
growthportfolio.ning.c...
"the facebook of technology and investing"

2008 Feb 04 04:24 PM

[Gaucho:]

Although the number of ships that he controlled may have been low it all depends upon how many he leased during that time. Many ships are leased for 6month to two years duration so the number on the spot market at any given time could be very low. With 20-30 ships leased at a steeply lower price over a two month period could collapse the price.

2008 Feb 04 04:55 PM

[cartledge:]

Correct gaucho. There are a lot of "temporary supply" and "temporary demand" issues that can effect BDI. Many ships are contracted out in 3-7 year deals. So though there are "6500 ships out there", there are significantly less be chartered out at a given time.

Message boards have speculated there there has been a manipulation for a long time. I was always very skepitcal of this talk, but maybe it turns out it is true. Anyway, it's impossible to manipulate markets long term without monopoly. I have faith in economics and long term prospects of these shippers.

2008 Feb 06 11:03 AM