Good News For Dry Bulk Shipping

Yesterday, Rio Tinto (RTP) announced that it signed a new iron ore supply deal for an 85% overall year over year price increase with Chinese Baosteel Group Corp. These prices will take effect retroactively to April 1, 2008. Companhia Vale do Rio Doce (RIO) had previously concluded its negotiations at a 71% premium to last year's prices. BHP is expected to quickly conclude negotiations at a comparable level to RTP.

This is all good news for dry bulk shipping. The spot prices for iron ore are more than double the agreed upon price. The Chinese steel producers had effectively stopped importing iron ore temporarily. They were using up their current stocks. I understand these were only enough to last another 2-3 weeks. This had led to a fall in dry bulk rates, since the Chinese were effectively not importing iron ore. With the settlement of this contract, the flow of iron ore to China will ramp up again quickly, even more so if BHP concludes its negotiations soon (as is expected). It means that there will be a lot more dry bulk shipping to China. It means that shippers such as DRYS, which contract mostly short term, will be much closer to 100% busy.

It means that there is considerable headroom for higher dry bulk rates than last year. Look for the dry bulk shippers to move up quickly on this news. Their ships will no longer be idled by this negotiations impass. Some of companies that should benefit are DryShips (DRYS), Excel Maritime (EXM), TBS International (TBSI), Navios Maritime (NM), Star Bulk Carriers (SBLK), etc. Companies such as Diana Shipping (DSX), which have longer term contracts, should benefit less.

Now if the markets start to recover too, dry bulk shipping will really take off. Many PE's are currently below 6. For example, NM's PE is currently 3.7. DRYS's PE is approximately 4.8. This is also good news for RTP and BHP Billiton (BHP). They should move up on this news.

Disclosure: none

Comments

[hannah007]

Author quotes the same statistics that every pumper dumper of these stocks does. If you want to get a good feeling for these investments seek professional advice not from here.

[Carl Martin]

If you actually read the article I think you might notice that the statistics are from the day before. Therefore this change should affect all stocks that are affected by Iron ore prices over the next few weeks or months. As the prices went up, what else, it would seem likely that the relevant stock prices would also go up. Unless, of course the markets had already factored the previously unknown prices in. I think the auther has done a good job of informing ordinary investors of a possibly important near term mover of stocks,either up or down. The rest of the information is very thoughtfully presented and offers a good explanation of recent market weakness. The P/E information offers a compelling reason to buy, for some people. Because of the relative lack of rationality in these markets, Dry Bulks often follow the general markets, and lately, that means down. Rationality will return when correct, timely, and relevant market information is available to all for free. That is exactly what the author and this website are trying to achieve. Sometimes I wonder what other people and websites are trying to achieve. Perhaps it not about achievement at all. Failure is also a possibility. It must really hurt to get burned so bad, that a need to burn others arises. In closing I would like to point out that the author dicloses NO OWNERSHIP in the stocks he writes of, though perhaps his wife or mother does. I own DRYS,EXM,GNK,DSX and will likely buy others.

[dryboss]

The price/free cashflow on these staocks is more compelling than the PE. They will all mint money over the next 2 years. Now we need to see some consolidation in the industry. If consolidation happens pricing power for the surviving entities goes up dramatically.

[billf921]

drys is down from 115 to 75 as the ceo has strayed from drybulk to ocean rigs. btw, he grossly overpaid for ocean rigs and dumped the crap to drys public holders.

secondly, the ceo has no problem issuing himself one million shares worth 75 m.

third, the ceo private company took long term charters at th public share holders expense

I cant get over his self serving moves and cashed out a million dollar position.

[David White]

hannahoo7: as it so happens a lot of these stocks are listed as good buys by professional analysts. NM has an mean analyst recommendation of 1.8 on Yahoo Finance today. DRYS is listed as a buy by the Street.Com, a strong buy by Ford Equity Research, Long by Market Watch (short term), and a buy by Jaywalk Consensus. I have since bought some options on one of these stocks. I think it has the potential for a good return. The news cited should make the stocks move higher. However, these stocks do tend to be market dependent. If the market goes down dramatically, they are likely to follow, even if the dry bulk situation is improving. The market news last week was extremely bad. There was the Israeli preparation for an attack on Iran. There was the midwest flooding. The Chinese earthquake wasn't too long ago. There was more bad banking news, although GS and MS did better than expected. There are the current California fires. Nigerian oil production has effectively shut down due to rebel attacks. Basically there are a lot of negatives which have driven the market down. If there are no big huge negatives in the market this week, I am expecting a bit of a recovery. This should allow the shipping stocks to move up on the above cited good news. Plus BHP is expected to conclude its negotiations in the very near future. I am guessing within the next 2-3 weeks. These negotiations are often completed by April, so they are already significantly late for this year. This should be further fuel to add to the uptrend. If you look at the charts for these stocks, you also see good technical support at their current levels, so one would expect movement upward soon. DRYS for example is just above its still rising 200 day moving average. One would expect a move upward from here on good news, such as that listed above. Further DRYS has recently become a player in the deep sea drilling arena. This sector has recently been upgraded by analysts (GS among others). DRYS price might benefit to some degree from the momentum in this area. NM was recently hit with disappointing earnings news. It is oversold. The mean recommendation of 1.8 by analysts would tend to make me think they agree with this assessment. Further NM has recently acquired a whole new fleet of small ships in South America. These are slated to begin adding very positively to the bottom line of NM in Q4 of this year. NM should really move up from where it is. Apparently Cramer disagrees with the analysts. Still NM does look like a fundamentally sound stock with excellent upside potential. EXM looks like it should also move up from its 200 day moving average. TBSI has recently announced the acquisitions of 4 ships. This will likely positively effect its bottom line in the near future. It is normally taken as a positive sign. Its mean analyst recommendation is 2.0 (a buy). Still this movement will likely be market dependent as I have said. If you think the markets are going to tank, you may wish to wait to buy. If you think this is just a pump and dump scheme, I think you probably don't know much about Dry Bulk Shipping. Still if that is what you believe, you should just stay away from these stocks.

[David White]

I should further point out that China is also short of coal at the moment. The above contract settlement (and the hopefully the soon to be done BHP one) may well act as a trigger to new contracts for shipping for coal importation. China defintinitely needs both of these materials for the Olympic build up and for earthquake recovery. Coal prices are currently much higher than 1 year ago. This may be part of the reason for the slowdown in coal importation by China recently. Still it looks like they simply have to have it, so I am expecting more shipping in this area too (very soon).

[billf921]

one other thing, as higher oil prices ripple thru the economy, a slowdown will happen. this slowdown will lowr dry bulk rates and profits

you don't want to be in any bulker stock if and when that occurs

[David White]

I should add SBLK has a mean analyst rating of 1.7.

[David White]

NM just announced that it has agreed to acquire two new Ultra Handymax ships. If the shipping market were going south, the people who know most about it would likely not be investing more money in new ships. They obviously have the opposite viewpoint.

[David White]

The DJIA is currently at a longer term support level. If we have any luck, the markets will bounce up from here.

[drys long]

billf921 - can you run through how he grossly overpaid for OceanRig? I calculate a valuation of the company at around 8 times 2009 EBITDA - what do you get?

[David White]

RS also just raised its profit estimate for the 2Q significantly due to higher steel prices. If China is going to use the iron ore to manufacture steel for its infrastructure needs, this should be another spur to prod them into quickly resuming iron ore importation. It doesn't look like prices in this area are going lower in the near future. After the Olympic build out and the earthquake recovery, this may change a little. However, China still has a quickly growing economy. They will still need to import a lot of raw materials.

[David White]

billf921: I think the Drys also now has at least two more deep sea drilling rigs due for delivery in the next 1-2 years. These should add demonstrably to the bottom line. This area is so hot, you cannot get these rigs. I think the buy of this company was a fantastic purchase.

[David White]

bill921: There is the fear that shippers will become like the arilines (i.e. less profitable with higher fuel costs). However, the prices of all commodities have been going up dramatically. Shipping prices are able to follow in line. The 200 day moving average on DRYS is still upward. In fact if you look at the chart, it looks like DRYS is at the bottom of a recent pullback. If the markets tank considerably from here. The bottom will likely be lower. If the markets start going up from here, DRYS is primed to at the very least reach its more recent highs of $95 and $110 approximately. It was even higher last year. Unless you are predicting a global recession, all of the hot economies will have to do a lot of shipping. It looks so far like the shipping costs can escalate with the commodity costs. DRYS has been doing mostly short term contracts, so it should not be very exposed to longer term movements in the price of fuel. DSX (longer term contracts) might be one to worry about, although I am not sure that fuel costs variances are not built into their contracts. You will have to look that up.

[David White]

Further because the credit is so tight currently, it is barring most new entry into the shipping arena. This gives shippers good pricing power. Specifically both the buyers and the ship builders are having trouble getting the necessary credit to build new ships. Further the new ships have gone up in price (the steel for instance costs a lot more) dramatically in the last few years. This means that the current players in the market have a huge margin advantage over any new entries. This is another barrier to entry. Further companies such as NM have options to buy many of the ships in their "chartered in" fleets. These options are for the much lower ship prices. I believe NM is currently trading for less than 2 times book value, and it has a greater than 50% ROI. DRYS also has a greater than 50% ROI. New entries into the market will have a hard time matching these numbers.

[David White]

DRYS has a Beta of 3.0 and NM has a Beta of 1.8, so you can see they will likely explode if the market goes up. They are clearly positioned to do just that. If the market goes down, they will likely follow it, although reluctantly. To me this seems like a good risk/reward. I am hoping the market is about to rebound. What the Fed says tomorrow may impact that significantly.

[David White]

I should point out that shippers are much more like trains than planes. They are a slower, but cheaper and more energy efficient way to transport huge heavy loads between countries separated by water. There is no real substitute. You have seen how well railroad stocks have done in the last year. Shippers are really in close to the same boat. They just don't have quite as much monopoly power as the railroads. After all, who can get the real estate to build more tracks? It would be virtually impossible for some of the long term tracks. The only real possibility would be to build new track next to the old ones on land the railroads already own. I have delineated some of the shippers' barriers to entry above.

[retrobeast]

all i know is drys will make you rich if you let it.

[David White]

Another thing to note is that NM and SBLK have little to no short interest at this point ( <= 2%). DRYS, EXM, and TBSI do have 10% or more short interest. However, they are so highly traded that this can apparently be covered in less than a day (TD Ameritrade data).

All of these stocks seem to be good values plays, although some are better than others. I have listed the P/E, P/S, P/B, and P/CF values for the stocks below (from TD Ameritrade):

NM: 3.74, 1.0, 1.28, 3.2
DRYS: 4.82, 4.49, 2.07, 4.89
TBSI: 7.89, 2.43, 2.79, 5.93
EXM: 6.8, 7.73, 1.74, 11.38
SBLK: 26.76, 12.78, 1.37, NA

I note the FPE of SBLK is 5.94.

Obviously the ones with healthy cash flow are probably the best risks in a volatile market.

[David White]

According to a MArketwatch article today, the RTP agreement also applies to BHP. Also Nippon Steel apparently is accepting the agreement. This should bode extremely well for dry bulk shippers.

[David White]

Also the agreement is back dated to April 1, 2008, so there are some windfall profits in this for BHP and RTP.

[Ramani Exchange]

Bilf: You mentioned that higher oil will hurt the shipping companies. I am not entirely sure this is the case. As the price of oil has risen, coal has fast become a favorite substitute. If there is more switching out of oil and into coal, this will benefit the shipping industry as many of these dry bulkers transport coal.

[TH Williams]

A few corrections to the above comments:
Nigerian oil production is not effectively shut down. While militants have made a significant dent in production the country continues to produce 1.5m b/d of oil.

China is not short of coal but estimated to be down to a 2 to 3-week supply. There is a difference. Demand is currently down due to internal reasons. Several coal consuming facilities (steel/energy) may be slowed down for the Olympic Games.

China agreed to a 96% increase in iron ore prices late yesterday. That is helping to boost the outlook for the dry bulk shippers today.

[David White]

The new iron ore prices for RTP and BHP may turn out to be a good thing for RIO. RTP and BHP got a premium price from China over RIO's price because the shipping charges would be lower. Apparently this is a first. The Panamax Dry Bulk Rates are up today. This may bode well for RIO (and some smaller shippers).

[David White]

TH Williams: No doubt you are rigth about the oil in Nigeria. I know there has been a significant shut in though. As for the iron ore prices, I quote from a Forbes article. "Baosteel had agreed to a 96.5% increase in the price of lump steel and a 79.9% increase in the price of fines, representing an overall 85.0% increase."

I have been getting conflicting information about whether BHP has agreed on anything with China though. Such a statement may have been premature.

[David White]

TH Williams: your statements about the coal supply are likely accurate. That was my impression too. I just considered that a "short supply". It is my impression that the supply on hand is normally several times that. You do make an excellent point about the Olympics. The air quality may in fact be a big reason that the coal importation has been less lately. I will look for it to heat up after the Olympics.

I know they now have (and are building more) plants which convert coal to diesel in China. Also I am sure the steel industry will be going full blast after the Olympics. They too may have been ordered to decrease their pollution for a short time. I am not really sure, but it does make sense. I will keep this factor in mind for future trades. I definitely have heard that the government has ordered certain businesses to decrease their pollution to proscribed levels during the Olympics.

[iMac]

Diana, Navios do not pay for fuel. Under LTC's the charterer pays. DRYS pays for fuel on it's spot charters only.

[David White]

iMac: Thanks for the great info. I should mention that the Dry Bulk Index was up today. I am expecting to see it generally rise in the near term.

[David White]

IMac's info does tend to make NM an excellent prospect for a rebound upward. Its longer term contracts should make it more immune to energy costs, although many other costs seem to have increased. Still if one is predicting problems in worldwide economies, the long term contracts would provide some insulation. The other costs which have been rising should not continue to do so in bad times. It looks like an excellent buy, especially with earnings from the new South American based fleet of small ships coming into paly in Q4.

[David White]

6-26-08: Dry Bulk Index was up again today. DRYS is showing extreme strength in the face of a down market, especially considering its Beta = 3.0.

[David White]

Ditto NM.

[SAMK]

I think what one has missed here is that most of the Dry Bulk ships have long time contract. Therefore ,their profit is guaranteed and stocks will go up when their 2nd QR earnings are reported. As mentioned by others - it is true that the stock price is driven by how market is doing daily basis - although the financial of these shipping companies are very strong. Many times stocks are up when BDI is down and vice-versa. No doubt - the shipping industry stocks are highly volatile and will remain like this rest of the year - must be watchful particularly when to get in and and get out. At this time, the long term prognosis is bullish- all the best to investors.