Is The Drybulk Rate Rally Just A Blip Or The Real Thing?

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Includes: DRYS, DSX, GOGL, NM, NMM, SALT, SB, SBLK
by: The Specialist

Summary

Last week spot rates for drybulk ships made a significant percentage jump.

Evidence suggests both supply and demand is hitting a perfect storm.

However there are a few other things that could a swift end to this party.

It's been really hard to even think about getting excited about the drybulk shipping industry, but last week, even if just a blip or a tease, made it a little easier if not maybe even encouraging. The Baltic Dry Index, or BDI, soared 137 points or 21% and with most drybulk shipping stocks popped as well such as DryShips (NASDAQ:DRYS), Navios Maritime Holdings (NYSE:NM), Diana Shipping (NYSE:DSX), Navios Maritime Partners (NYSE:NMM), Safe Bulkers (NYSE:SB), Star Bulk Carriers (NASDAQ:SBLK), and Golden Ocean Group Limited (NASDAQ:GOGL) and Scorpio Bulkers (NYSE:SALT). There appeared to be good reason for the positive performance although there is reason to be concerned about a reversal as well.

I'll focus on the larger Capesize ship rates for two reasons. First, those rates were up 58% or well more than the smaller ships. Second, if and when a big rate rally does happen, Capesize ships tend to lead the way ahead of the smaller ships although sources say the South American grain export market is heating up something fierce and is expected to last.

The theme and problem with the drybulk industry has been world fleet overcapacity. Demolition and scrapping of old ships has picked up at a feverish pace giving some faint hope of better supply balance but many or most have viewed this with skepticism on how much it will really help the glut considering new deliveries from old orders keep pouring in.

The demolitions have surpassed expectations to the point of actual negative supply, despite new deliveries, for the Capesize market through the first four months of the year - about 37 new deliveries versus 65 demolitions. As they say on game shows: But wait, there's more!

So far in June a jaw-dropping 17 additional Capesize ships were sent to the scrapyard bringing the year-to-date total to at least 82. This is a much needed supply reduction and it may have very well had a large part to do with the rate rally of last week.

The bad news, according to the linked report above, "An estimated 70-75 capesize ships, and perhaps more, are idled (anchored and not trading at all) or laid up globally. Another 50-60 are estimated to be anchored and "awaiting orders" in the Atlantic and Pacific." This suggests additional supply ready to come on board and subdue or possibly even reverse any rate rally unless demand and/or further demolitions overpower this.

Further good news includes iron ore inventories in Chinese steel mills at their lowest not seen in quite some time. Many voice concern about China's "slowing" economy and housing/construction industry but that term "slowing" is often misunderstood - there is still more iron ore demand expected than last year and that suggests more shipping demand than last year as well.

On the flip side is a concern that demand could actually shift negatively. The China Iron & Steel Association just estimated that steel output could decline up to 2% this year due to shrinking profits for steelmakers with some of them actually operating at a loss. According to the association, "A rally in iron ore and a persistent fall in steel prices have presented a grave situation for the Chinese steelmakers."

It will be interesting to see what this week brings. I continue to watch with no positions in these stocks as I'd rather be late (with presumably less risk) to any potential drybulk shipping rally than too early.

Disclosure: I/we 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.

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