Dry Bulk Shipper Anomaly in Spot Pricing Creates Buy Opportunity

Includes: DRYS, GNK
by: Stephen Rosenman

Right now an anomaly exists in dry bulk shipping. The rates for chartering vessels for 1 to 2 year periods are far greater than the spot rate. Usually it's the other way around.

For instance, you can get $157,000 - 167,000 a day to rent out a Cape sized vessel for a year, $135,000 a day if you go out 2 years, much better than the $116,391 at the current spot rate. The Panamax sized vessels have similarly higher prices for one ($71,000) and two ($63,000) year charter periods over spot rates ($57,450). That doesn't make much sense. When you charter a vessel for a one or two year period, you get the comfort of knowing you've got a steady stream of income coming in. Typically, you give up some of the higher rates of the spot trade for this long term safety.

This anomaly tells us a lot about where dry bulk shipping is now. First, the rates are wonderful for the shippers. It costs them only $6,500 dollars a day to run a cape sized vessel. The rate of return is phenomenal. You can currently get $150,000 to 160,000 a day in profit for one year charters!

Second, the fact that period rates are better than spot rates tells us that the demand for vessels is so great that the market is willing to pay whatever it takes to charter a boat. There is a palpable worry that all the rates are going higher -- spots, periods -- and the sooner you can lock in the price, the better. We've seen lots of evidence. The Baltic Dry Index, the index that compiles the spot rates for 40 routes of dry bulk shippers, is rising sharply, up about 40% in a little over a month.

In addition, iron shipments are going to skyrocket. For months, iron shipments have been held back. That's about to change. Vale (NYSE:RIO) just negotiated a 65% iron price increase with Japanese, Korean, and Chinese steelmakers. Iron makes up about 40% of dry bulk shipping. That resolution will unleash the pent up shipments of coking coal and iron that have been held back these three months.

How to play the dry bulkers? Those dry bulkers who specialize in longer charters like Genco Shipping & Trading Limited (NYSE:GNK) (who have a couple of vessels getting ready to re-contract) are going to benefit as their current contracts come due. They will take advantage of the appetizing charter rates. But much much more exciting are the dry bulkers who primarily do spot trades like DryShips (NASDAQ:DRYS). DRYS can pick and choose. Most of their boats are already at spot. They have very few long term commitments. As rates continue to climb, DRYS can continue the spot market or, at any time, go longer term, take advantage of the high period rates and be guaranteed to make a killing.

Disclosure: Long DRYS and GNK