Shippers have been on a tear in the past couple of weeks in large part because of rising charter rates for shipping commodities like iron ore and grain. The Baltic Dry Index, which reflects how much it costs to move raw materials by sea, has zoomed from 1,132 on Aug. 30 to more than 2,000 this week — a far cry from the sub-700 level that kicked off 2013.
A few other reasons that dry bulk shipping stocks might continue to regain their sea legs:
- The severe oversupply of ships triggered back in the industry’s halcyon days of 2007 and 2008 is beginning to ease.
- Growth in China’s steel production — coupled with low iron ore prices — is fueling demand for that resource. Global shipments of grain also are rising rapidly.
- Rising tension in the Middle East — particularly in Egypt — raises the threat of disruptions in the Suez Canal, one of the world’s most important shipping routes. If the canal were to be unavailable to shippers, vessels would be forced to make the much longer and more hazardous voyage around the Horn of Africa to move their cargo. Greater risk means higher rates.
Before you jump into the dry bulk shipping space, it’s important to remember that the shipping industry is extremely volatile, the headwinds are strong and the market caps are comparatively small — some are lower than the cost of a single ship.
Still, big returns are certainly within these companies’ grasp, so adventurous investors should consider small allocations to some or all of the following shipping stocks:
Diana Shipping’s (DSX) fleet of 35 dry-bulk vessels is employed primarily on medium to long-term time charters and transports a range of dry bulk cargoes including iron ore, coal and grain.
Those charter commitments add stability, but the company is writing new business, too, and those new contracts will enable DSX to take advantage of appreciation in spot rates. For instance, last month, Diana inked a new charter deal with mining conglomerate Rio Tinto (RIO).
DSX is expanding its fleet prudently, too. Earlier this month, it acquired the MV Stefania Lembo — a 2010-built Kamsarmax dry bulk vessel — at auction for a purchase price of $22.7 million. Diana also plans to take delivery of two new Ice Class Panamax dry bulk vessels between the Q4 2013 and the Q1 2014.
DSX has one of the sector’s strongest balance sheets and as a dry bulk pure play stands to gain most from the factors that are driving up the Baltic Dry Index — specifically, stronger iron ore production and exports from Australia, continued growth in China’s steel production and stronger grain shipments.
Also, Diana’s $1 billion market cap is notable considering the lion’s share of shipping stocks are measured in hundreds of millions or even tens of millions.
Navios Maritime Holdings
Navios Maritime Holdings (NM) is a global, vertically integrated seaborne shipping and logistics company … and as such, gives investors a more diversified opportunity than most dry bulk pure plays.
While dry bulk is a major component of its operations, NM also has its fingers in a couple of other promising pies: it’s a nearly one-fourth owner of the master limited partnership Navios Maritime Partners (NMM) and is a majority owner of tanker-focused Navios Maritime Acquisitions (NNA).
Navios Holdings has contracted 90.3% and 27.7% of its available days on a charter-out basis for 2013 and 2014, respectively. That mix ensures cash flow for the remainder of the year, while giving NM the ability to take advantage of rising spot rates in 2014. Also, earlier this month, NM announced the delivery of two Panamax vessels: the Galileo and the Amitie, both of which have been contracted for six-month charters. The addition of these two ships gives NM a total of 50 in the water.
As one of the sector’s largest places, NM’s size and operational scope adds stability. Plus, NM is the only one of these four picks that offers a dividend — and at a yield of 3.3%, it’s no token payout, either.
Genco Shipping and Trading
When you start looking at dry bulk shipping stocks like Genco Shipping and Trading (GNK) that have market caps under $250 million, you’ve got to be willing to take on additional risk for the potential breakout returns.
Like most small shipping companies, GNK is cash-strapped and has been pummeled by dirt-cheap charter rates; it’s also struggling with a debt load more than seven times its market cap.
But sometimes the smaller dogs have the bigger fight — and that’s part of the proposition with GNK. The company has pared back costs in recent years and is lean, mean and agile. The bulk of its more than 50-vessel fleet is leased on short-term charters, enabling it to take full advantage of rising charter rates. If the Baltic Dry Index continues to soar, GNK could be a winner.
Nevertheless, this is a “mad money” bet — and the volatility can’t be overstated. Genco has risen and fallen in huge chunks at various points of this week alone.
Star Bulk Carriers
All of the cautions about small-cap shipping stocks applies in an equal degree for Star Bulk Carriers (SBLK) — again, so does the potential upside.
In addition to the good news for dry bulk charter rates in general, Star posted a net profit of $800,000 in the second quarter — not much by most standards, but a significant improvement compared to the $4.6 million loss during the same quarter last year.
Star Bulk has an operating fleet of 13 dry bulk carriers — five Capesize and eight Supramax vessels — as well as six additional third-party dry bulk ships currently under management. Speaking of management, President and CEO Spyros Capralos has done a great job of getting his company ship-shape this year. “Star Bulk is a completely different company,” he said recently.
SBLK is well-managed, cheap and has potential for significant upside. The company raised $80.1 million in an equity offering earlier this year, and its earnings outlook is improving. The majority of the funds raised are being used to fund the purchase price for two Capesize ships and two Ultramax vessels. Star Bulk also made a strategic shift to offering third-party ship management — an area that company officials say is beginning to produce tangible results.
If SBLK stays on course and charter rates continue to rise, it could reward investors handsomely.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.