I took a lot of heat for my "flip flop" stance on dry shipping last week when I wrote Dry Shipping Stocks: Is It Time To Throw In The Towel? turning from a dry ship stock bull to a bear seemingly overnight. My reasoning, as stated, was a triple whammy of bad news for the industry that spelled continued disappointment for the rest of the year for these stocks as a group. Weaker than expect steel demand in China, lower than expected exports from Brazil, and higher than expected exports from Australia are all working together to keep shipping rates in the dumps and what is supposedly to be a seasonal good period for dry shipping acting as a dud instead.
Well it's a good thing I bailed my Baltic Trading Limited (NYSE:BALT) position and continued to avoid DryShips (NASDAQ:DRYS) like the plague. Dry shipping stocks such as DRYS, Diana Shipping (NYSE:DSX), Navios Maritime Partners (NYSE:NMM), Safe Bulkers (NYSE:SB), Star Bulk Carriers (NASDAQ:SBLK), and BALT once again collapsed across the board last week at an even worse clip than the week before. And it was for several good reasons including the corresponding collapse in shipping rates as measured by the Baltic Dry Index or BDI.
As you can see above, the BDI plunged 15% and the extremely important Capesize rate dove down 38% and is now a staggering 72% below what it was the same time last year. Ouch!
So what's going on?
Aside for more of the same (did you think the demand and shipment schedule was going to suddenly reverse over the last week?), a report from China Daily couldn't have helped the situation. The report says according to China Metallurgical Industry Planning and Research Institute, iron ore imports to China are expected to grow by 6.4% next year. While that sounds good at first glance, the industry is already plagued by overcapacity which is growing, and a 14.7% growth in iron ore imports expected to be tallied for 2014. Something closer to 14.7% growth was desperately needed to absorb the overcapacity and return rates to healthy levels again.
I'll throw my two cents in here: Something that always bothered me in the back of my mind but I didn't want to admit to myself was all of the high optimism by industry players, analysts, and "experts." You've heard of the term self-fulfilling prophesy, right? Well I think we have seen a self-defeating prophesy. The very reason we have such huge overcapacity was that ultra-high expectations meant everybody was ordering new ships built and delivered with reckless abandonment in anticipation of higher demand. Demand is higher, much higher, overall but supply is even higher and has killed that demand.
You can't make much money selling lemonade if everybody else on the block is selling is also selling lemonade. This is even more true is everybody is expecting a heat wave long in advance and everybody is stocking up on supply ready to sell. That's exactly what seems to have happened with the dry shipping industry. There are just too many new kids on the block all peddling their Capesize ships and not enough thirsty mouths for it all. Maybe these stocks are so severely beaten down that there could be a contrarian play here, but whatever play there is it will be without me for the foreseeable future.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.