Dry Bulk Shipping: Time To Take Profits?

Includes: DRYS, DSX, GNK, NM, NMM, SB
by: Robert Shurtz

In a previous article I argued that dry bulk shipping had hit bottom and should begin to move up on better balance between supply and demand. Dry bulk shipping rates have soared in recent days. As a result in the last month Dryships (NASDAQ:DRYS) and Safe Bulkers (NYSE:SB) are up 50%, Navios Maritime (NYSE:NM) is up 30% and Diana Shipping (NYSE:DSX) is up 20%. There is some profit taking today. Is it time to take profits? Dry bulk shipping shares are highly correlated with shipping rates. It is very important to understand the seasonal patterns in shipping rates.

Some of the biggest seasonal effects on dry bulk shipping are weather related. Dryships in its annual report states that the seasonal pattern is "stronger in fall and winter in anticipation of stronger consumption of coal and other raw materials in the northern hemisphere during the winter months." Furthermore, the monsoon rains disrupt Indian trade from June to September. This year's monsoon is nearly over. Rain in Brazil disrupts trade from December to March. Iron ore production is particularly affected and exports usually increase in q2 or q3. December through March also can suffer from weakness due to low temperatures in China and rain in Australia. Australian iron exports in February 2013 were 16% less than in December. Brazilian iron exports in February were 25% less than in December.

The other major seasonal factor is grain. South American grain is primarily shipped in the spring and North American grain is shipped in the fall. Grain exports were down last year but grain should be up this year. The North American grain crop is good this year despite a little late weakness and demand in China is strong.

There is talk of seasonal patterns in steel. Perhaps there is some seasonality in iron ore stocking but if you look at data world steel production seems fairly steady and the variation somewhat random.

So in the winter demand for dry bulk shipping is at its low point as North American grain shipments end and rain in Brazil and Australia reduce iron ore supply. Demand picks up a bit in the spring with South American grain shipments and then falls in the summer when South American grain shipments tail off and the monsoons hit India. In fall North American grain shipments begin and the Indian monsoon season ends. Shipping rates typically peak in October and November with good weather and strong grain and coal shipments.

These seasonal effects are usually quite large. In 2012 the Baltic Dry Index (BDI) rose 67% from September 22 to November 28. In 2011 the BDI rose 72% from August 2 to October 17. The average increase from the end of August to the end of November from 2002 to 2012 was 35% (excluding 2012 when the BDI plummeted in the fall). The average increase from the summer trough to winter peak from 2002 to 2012 was 88% (excluding 2008). In the winter the BDI usually drops 20% from the end of November to the end of January and 33% from the fall peak to the winter trough.

Shipping rates do sometimes peak in September. It happened in 2010. However, I expect the BDI to continue to rise into October. Recent increases in capesize rates are primarily due to strong demand in China for iron ore. We are just beginning the North American grain export season. US bulk agricultural shipments typically are 30% higher in October over September. Increased grain shipments should help panamax rates.

As to which companies I prefer I like DRYS, SB and NM. Mitsui OSK has the best capesize exposure but it is too difficult to trade in the US. Navios Maritime Partners (NYSE:NMM) price has been supported by its high dividend so it has not participated in the rally. DSX is a good conservative choice. I do not like Genco Shipping (NYSE:GNK) as it is heavily in debt and facing possible bankruptcy.

I have taken some profits with these rapid increases in dry bulk shipping but I have hung onto most of my shares. I am expecting a few more weeks of rising shipping rates. I plan on taking further profits in October closer to peak rates and possibly buying back shares in January or February on seasonal weakness. However, I will maintain a large position as I expect continued strength in dry bulk shipping in 2014 as the global economy continues to recover. I don't expect a huge surge in newbuildings since dry bulk shipping profits are still low and in any event it takes 18 months to build a dry bulker.

Disclosure: I am long DRYS, SB, NM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have taken some profits in DRYS in the last week.

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