Diana Shipping (NYSE:DSX) is an industry leader in the dry bulk shipping industry focusing on the transportation of coal, iron ore, grain, and other commodities. Over the last four years, the company has seen a significant decline in its top and bottom lines. Between 2009 and 2013, its revenue has decreased from nearly $240 million to $164 million. During the same period, its net profit of $121 million turned into a loss of $21 million.
Future of Diana shipping looks bright. As a shipping company, its performance is highly dependent on the trade of raw materials across the globe. Iron ore and coal imports are key factors that drive shipping rates. Rapidly growing iron ore and coal demand in China is driving the demand for dry bulk vessels. China plays an important role in the dry bulk shipping industry. According to DNB Markets, the world's dry-bulk order book is split mostly among China (58%), Japan (30%) and South Korea (9%). Since 2011-2013 deliveries, China's market share has increased from 51% and Japan's from 27%.
Due to increasing steel consumption, Chinese in iron ore demand is growing quickly. The country's steel production is expected to rise year-on-year by 4% this year. China is the world's biggest buyer of iron ore, accounting for 63% of global imports in 2013. Its iron-ore imports are expected to rise 6% this year to 870 million metric tons. China's dependence on foreign iron ore is expected to rise to 949 million tons, or 77% of its total consumption in 2016 from 72% last year.
Chinese coal demand is also increasing. The country's coal imports are estimated to increase from 289 million tons in 2012 to 400 million tons in 2017. Besides China, coal demand is also growing quickly in India. India is expected to become a bigger importer of coal than China within the next five years. India's coal imports are estimated to increase from 137 million tons in 2012 to 265 million tons in 2017. Increasing iron ore and coal imports from China and India represents a huge opportunity for Diana Shipping. The imports will help the company, as its customers mostly ship to these regions.
Diana has one of the strongest balance sheets in its industry. It has some of the highest liquidity in the sector as well as some of the lowest leverage ratios in the industry so if poor times continue, it will be able to continue operating where others will not. (Total Debt-to-Equity ratio 36x of VS industry average of 136.81x). With a strong balance sheet, the company is positioned not only to weather the storm in the dry bulk shipping industry, but to also seize upon acquisition opportunities. The financial position of Diana allows for the company to take advantage of many more opportunities than other companies. The copious amounts of cash on hand will allow to grow their existing fleet in order to take the advantage of further opportunities. Their financial strategy to incur the least amount of debt will also help them finance such endeavors at cheaper rates.
Diana owns a high quality, young fleet. Weighted average age of its ships is 6.6 years compared to the industry average of around 9.5 years. The importance of having a younger fleet is that the company can reduce its capital expenditures for a few years, which Diana has been doing. Older vessels tend to be less fuel efficient and have higher maintenance costs. Cargo insurance rates also increase with the age of the vessel. Charterers are more likely to align themselves with a younger vessel because it keeps costs down for them as well. The company's young and high quality fleet reduces its operating costs, improves safety, and provides a competitive advantage in securing favorable time charters. Moreover, with its high-quality fleet, Diana has been able to and should continue to win charters with top-tier customers such as Cargill International S.A.
Diana has a successful business strategy in terms of their charter contracts with their clientele. The company has successfully implemented a strategy to diversify their contract lengths in order for them to maintain consistent revenue and exploit spot time rates. Time charter rates are very volatile in this industry, this is due to the index for which they are created, the Baltic Dry Index. Diana charters some of their vessels on short-time charters, usually between 11 and 14 months. Currently, nine vessels are on charters that will expire within the next 6 months. This strategy helps them benefit financially from times of increasing charter hire rates.
The longer-term contracts usually run from 17-62 months. The long-term charters create a steady and stable revenue stream for Diana. They are able to use an array of shorter term charters in order to take advantage of higher BDI levels. This increases the amount of revenues being brought in per ship at these higher levels due to the charter rate increases. Therefore, locking charters into these higher rates will allow for better profits. At the same time, having too many short-term contracts could potentially ruin a business when the BDI is falling or expected to fall. The longer-term contracts provide a steady stream of revenues when the BDI is at these lows.
In conclusion, Diana appears to be an extremely appealing company which operates in a high potential industry. Despite the economic decline, the company is still financially sound and one of the premier dry bulk shipping companies in the world. Growing Chinese iron ore and coal imports will increase the dry bulk ships demand as well as rates. Due to high quality and young fleets, Diana will remain attractive for charterers. In my opinion, Diana is a strong buy right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.