Dryshippers: A Buy or a Sell?

The Baltic Dry Index has had a sickening collapse this month. The largest of its vessel class, Cape size vessels, for instance, has dropped from $235,000 a day in June to approximately $80,000 a day this September. The whole fleet of drybulk shippers has sunk with the index: Dryships (DRYS), Genco (GNK), Diana Shipping (DSX)  to name a few. Looking at the BCI (Baltic Cape Index) looks like a treacherous ski slope.

Is this the time to buy or sell the dry bulk shipping stocks?

If you believe we are entering a prolonged global recession, it may be time to bail.

I'm not so sure. Historically, large and fast drops of the BDI and BCI are often followed by rapid rises. One has to look no further back than last November when the BCI was at $190,000 and then fell to $80,000 in January only to recover (and then some) to $235,000. It's a very volatile index. That last drop was due to China and the miners haggling over iron prices. The ensuing recovery unleashed an extraordinary pent up demand for shipped dry bulk goods and tripled charter prices.

This time the indexes appear to be dropping once again because the Chinese are not buying. They appear to be holding off, instead living off inventories built up in preparation for the Olympics. China is a country which must import iron and coal to support its growth. If history is any guide, China will bring in commodities once again, driving up the BDI and BCI and boosting dry bulk shippers.

Of all the times of the year, September thru November has consistently seen rises in the BCI. During that period in 2003, the BCI rose 100%; in 2004, 17%; in 2005, 40%; in 2006, 7% ; in 2007, 60%. If the index follows this pattern, Cape prices should be much higher by November.

The BDI and BCI are explosive. They reflect the ever changing supply and demand on vessels trading on the spot market. The individual dry bulk shippers, for the most part, charter their vessels out 2 to 3 years, even 5 to 10 years, to avoid the frequent ups and downs of spot market. GNK, for example, has most of its ships tied to long charters that will not be exposed to the vagaries of this current BDI down turn. The shippers lock in favorable long term charters to avoid the tos and fros of the spot market but the traders treat their stocks as if they were completely exposed to the BDI. However, for the reasons above, the BDI and BCI should turn up, and perhaps, explosively so over the next 2 to 3 months.

Stock position: Long GNK, DRYS. 

Comments

[bdp1Consult...:]

Absolutely these indices and the underlying rates are very volatile. The shipping market has lost a lot of confidence- as evidenced by forward rates, in swap prices, have also come down.

But, I am bullish since I don't see any change in the fundamental demand picture. And, as pointed out, seasonality would suggest a pickup in Q4. Short term- various dislocations, yes, but China has not stopped producing steel. For stock traders, the shipping stocks present great zigs and zags because of the underlying volatility even in the context of a longer term trend (whether that be up, or down).

2008 Sep 09 07:01 AM

[Mexx:]

Good article. I've owned GNK for a while, and have seen the up and down swings on the stock - the Chinese are living off their inventories right now but cannot do it indefinitely. Demand for coal and other dry goods will return and the BDI will soar.

2008 Sep 09 07:28 AM

[bgollings7:]

Good article. Have you considered looking at DWT as well? While I agree with your thesis, this stock has only been public since June and as such has the least following. It seems to have gotten punished moreso than its peers.

2008 Sep 09 09:12 AM

[bgollings7:]

Good article. Have you considered looking at DWT as well? While I agree with your thesis, this stock has only been public since June and as such has the least following. It seems to have gotten punished moreso than its peers.

2008 Sep 09 09:12 AM

[twhite113:]

This is a news item from today, that talks about the demand in China for rebuilding infrastucture destroyed in their recent earthquake. ~$200B over three years. That is alot of unanticipated commodity demand.

news.yahoo.com/s/ap/20...

2008 Sep 09 09:21 AM

[the good one:]

EXCELLENT ARTICLE. I AM LONG GNK AND AM PRESENTLY DOWN
$28,000. I AM CONTEMPLATING AVERAGING AT TODAYS PRICE. YOUR ARTICLE HAS CONVINCED ME TO DO THIS..THANK YOU

2008 Sep 09 11:21 AM

[deniska:]

Chinese iron ore inventories are at all time high, actually up 1m tons last week - where do you see them living off their inventories???

2008 Sep 09 12:09 PM

[cartledge:]

the good one - Do your own research. Never trust an article or author who can't spell the company name that he is talking about (Gen*k*o Shipping). *sigh*

2008 Sep 09 03:31 PM

[Darburro@ya...:]

This article hits the nail on the head. The problem with Bulk Shipping stocks is that there are too many speculators and people who have not done their homework buying and selling these stocks as well as short sellers playing games with DRYS and GNK. They look at the Baltic Index as if it were a messiah, not understanding that the big shiping stocks do not play the spot market any longer because of the volatility. They are signing long term charters and locking in nice rates for several years. They are even chartering ships before they are finished building them. I heard on an earnigs call that it costs a Dry Bulk ship owner about $ 7000.00 a day to run a ship. Thats it - they do not even pay for fuel - the charterer does that, and they lease them out at the prices mentioned in the article, so even at $ 80,000.00 a day - the low end of the scale, look at the profit they are making. Another stat mentioned in an quarterly report from one of the companies was that over the next 20 years China will be building 102 brand new cities that do not even exist today and each will have a population of 1 million people. Think about that - and all of that concrete, steel and other comodoties will have to be brought in by ship. What does that say about the long term of this market.
I own 300 shares of GNK, 1000 shares of Eagle and 1000 shares of Diana. I am down in 2 of the 3 ( Eagle and Genco ), but I have no plans on selling. They are planning to raise dividends so why would I. Hang in there and lets hope that the speculators and uneducated get scarred away by this downturn and leave it to those of us who actually understand this market and can see its potential. Buy more people - this is a sale.

2008 Sep 09 04:43 PM

[ritr54:]

A lot of these pay nice dividends!!!

2008 Sep 09 04:51 PM

[Urbane Gori...:]

The Chinese are presently restricting the export of many of their commodities (Apparently in an attempt to push prices back down) ... This is notably true of coal and fertilizers. But based on their infrastructure needs and a hungry population, it would seem that they'd have to pick up the pace sooner or later.

Further, they have just now lifted the curbs on driving and production that were set in place during the Olympics in order to stem pollution.

I'd still watch the Baltic index, steel, coal and fertilizer stocks for a pickup in demand before plonking down any money in this market.

jegan ;-)

2008 Sep 09 04:54 PM

[The Realist:]

Please note that there is a tremendous supply of new ships coming on to the market over the next few years. This has an effect on the shipping index. Whether all the ships are delivered during a global recession is one thing, but clearly any increase in supply leads to a decrease in price.

2008 Sep 09 11:54 PM

[Income & Yield:]

For the companies with long-term contracts already in place, rates and ship supply should not matter if their costs remain stable.

2008 Sep 10 01:24 AM

[bsharvy:]

I'm more interested in finished-goods shippers, but I can't find much info. Any help?

2008 Sep 11 12:13 AM

[w5737:]

Both Dac and ssw are "finished goods" shippers as are other containerships. both operate under long term charter(10-12yrs) agreements. So the bdi has very little to do with their gross income


On Sep 11 12:13 AM bsharvy wrote:

> I'm more interested in finished-goods shippers, but I can't find
> much info. Any help?

2008 Sep 24 10:52 PM

[la princesa:]

I own DRYS and DIANA and have watched them "sink" along with the general market. I am such a big loser at this point, do you think I should simply hang on. I am particularly concerned about DRYS. Also, how long do you think it will take to have these shipping companies "move" again? anyone with suggestions, I would like to hear from.


On Sep 09 04:43 PM Darburro wrote:

> This article hits the nail on the head. The problem with Bulk Shipping
> stocks is that there are too many speculators and people who have
> not done their homework buying and selling these stocks as well as
> short sellers playing games with DRYS and GNK. They look at the Baltic
> Index as if it were a messiah, not understanding that the big shiping
> stocks do not play the spot market any longer because of the volatility.
> They are signing long term charters and locking in nice rates for
> several years. They are even chartering ships before they are finished
> building them. I heard on an earnigs call that it costs a Dry Bulk
> ship owner about $ 7000.00 a day to run a ship. Thats it - they do
> not even pay for fuel - the charterer does that, and they lease them
> out at the prices mentioned in the article, so even at $ 80,000.00
> a day - the low end of the scale, look at the profit they are making.
> Another stat mentioned in an quarterly report from one of the companies
> was that over the next 20 years China will be building 102 brand
> new cities that do not even exist today and each will have a population
> of 1 million people. Think about that - and all of that concrete,
> steel and other comodoties will have to be brought in by ship. What
> does that say about the long term of this market.
> I own 300 shares of GNK, 1000 shares of Eagle and 1000 shares of
> Diana. I am down in 2 of the 3 ( Eagle and Genco ), but I have no
> plans on selling. They are planning to raise dividends so why would
> I. Hang in there and lets hope that the speculators and uneducated
> get scarred away by this downturn and leave it to those of us who
> actually understand this market and can see its potential. Buy more
> people - this is a sale.

2008 Sep 29 11:41 AM

[MttFrog13:]

I sure hope DRYS goes up. It took a hit from the financial crisis and i bought it at $37. I'm hoping that since it isn't directly involved in that crisis, just indirectly, that it will bounce up to $60-$70 in the coming months.

2008 Oct 07 08:46 PM

[iansane:]

DRYS is at $3.85 and sinking...Nov.20/08


On Oct 07 08:46 PM MttFrog13 wrote:

> I sure hope DRYS goes up. It took a hit from the financial crisis
> and i bought it at $37. I'm hoping that since it isn't directly involved
> in that crisis, just indirectly, that it will bounce up to $60-$70
> in the coming months.

2008 Nov 20 10:37 AM