glenwpeterson

Dry Bulk Shipping Valuations Approach “Bubble” Proportions

Sounds like a very big dose of talking your book to me. Let's short the shares of a company that has, indeed, run up big time, and then hope for some help. Trouble, is the sector is on fire for good reasons.

1. There is currently, in the 2007 and 2008, a dearth of the ships this author thinks the new ship yards (unfinished shipyards) in China are going to pump out. Problem there is it takes awhile to build them. Like about three years. And there is a three year back log. Go figure. Did I mention that these shipyards aren't coming on-line until 2010.

2. Ton miles have increased in the sector as well adding fuel to the fire. This is because India has created a tax on it's iron ore exports to keep the prices down for it's own steel-makers at home. As such, China is now seeking iron ore for those very same ship yards to build the ships (out of steel) from Brazil and S. America. Ergo, longer routes tie up more ships for a longer time. When is that situation going to change. Not anytime soon. I might add that India's GDP growth is also creating increased demand for shipping in and out of that country as well.

3. Bumper crops of corn and beans are coming out of N. and S. America this year too. China now imports a ton of grains from both places, as it's rising standard of living is fueling a better diet, filled with grain fed beef, poultry and hogs. Can you say, Brazil. I knew that you could. They've got the biggest reserves of arable land for Ag growth in the world. It's a long way from China to Brazil.

4. The author mentioned China's thirst for coal correctly. They recently became a net importer for the first time and that trend is not likely to go the other way any time soon. Especially if all those shipmakers actually do get up and running.

5. Ya wanna talk Australian infra-structure problems, it's not just a port problems, it's a rail problems too. If you can't get the stuff to market due to demand, ya gotta not only improve the ports, but improve the rail capacity too. Again, how long does it take to put on extra track and trains and locomotives. Not as fast as it takes to fire up a few "widget" plants in this authors mind, I can tell you that.

6. First and formost, you're comparing apples to oranges with GNK and DRYS. GNK book medium term time charters. Currently most of their ships are running on charters booked two and three years ago at $45K. 8 of the 19 panamaxes and handys are coming off charter from all those unhappy, fickle customers.
And current spot rates are miles, and I do mean, miles above current medium term charter rates. DRYS is a pure play on the spot market and it's fortunes will be volatile for sure. But I wouldn't bet against it in the next 18 months unless the world economy stumbles big time.

7. The author conveniently failed to point out that the industry is also highly fragmented. No single owner owns more than 5% of the the entire world fleet of any of the main classes of ships. In fact, the industry looks a lot like the oil tanker industry did back in 1999. A quick fact check will show you that there has been significant consolidation, and all of the public companies have benefited enormously as they have steadily grown their earnings and assets. Those with liquidity are going to be able to grow market share big time. GNK just bought 9 capesize vessels and will be increasing it's earnings power by over 50%. At the same time, it's increased it's position in a Chinese Shipping company as well.

Want to short these companies. Be my guest. In the very near term, sub-prime jitters in the U.S. market might help you out. But, with Brazilian, Indian and Chinese GDP's on fire and Europe, Japan and Korean doing just fine, I'll take my chances that those shipyards he talks about will start delivering ships in 2010. Until then, I think I'll be holding what I've got and adding a few more as these stocks continue to climb north and pay big time dividends to boot.

But thanks to all the shorts out there for putting the stock on sale from time to time.

Check back with me in six months and let's see whose still holding their position.

Glen Peterson
Private Investor
Northfield, MN