While a rebounding economy should be the tide that lifts all boats, the twin torments of low charter rates and too many ships have left dry bulk shippers tacking against the wind. Container cargo shippers have had a miserable month as Australian floods closed coalmines and railroads, charter shipping rates fell through the cellar and new capesize ships entered an already bloated market.
There was some optimism that dry bulk shipping rates would rebound if the crisis in Egypt resulted in a closure of the Suez Canal. That would have forced shippers to sail an additional 6,000 miles around the Horn of Africa and rates would have risen substantially. Those fears so far have proved unfounded, although markets were temporarily spooked on Tuesday when a cargo ship transiting the canal ran aground in bad weather, blocking five ships behind it for two hours.
But ultimately, that news amounted to little more than a blip on the radar. It’s the underlying challenges in the market that threaten the near-term outlook for dry bulk shippers. In the wake of downgrades from “buy” to “hold” on Eagle Bulk Shipping (NASDAQ: EGLE), Genco Shipping & Trading (NYSE: GNK), Paragon Shipping (NYSE: PRGN), FreeSeas Inc. (NASDAQ: FREE) and Navios Maritime Holdings (NYSE: NM), Dahlman Rose last week cautioned that the dry bulk shipping sector might not fully recover until 2015. Here’s why:
Too Many Ships. In the champagne-and-caviar heyday of 2006-2008, ship owners placed hundreds of new orders for the biggest and best ships available. Capesize ships, which are particularly popular for transporting coal and iron ore on long-haul Far East and Australia routes, represented a lot of the new investment. But delays pushed delivery of many of those new ships to 2010, and they’re now emerging from the shipyards into a very different marketplace. Although owners have canceled some orders and scrapped existing ships to make room, the global shipping fleet still increased by nearly 20% last year.
Painfully Low Rates. That much surplus shipping capacity makes for a buyers market. The day rate for chartering a large, dry-bulk capesize ship has collapsed from $40,000/day last November to a mere $5,000/day last month, according to the Baltic Exchange. It can cost up to twice that much per day to actually operate the vessel.
Plummeting Ship Values. With such a great surplus in the global shipping fleet, ship values are dropping like an anchor — and taking dry bulk shippers’ profits with them. It’s more of an issue with dry bulk shippers because of their heavy reliance on capesize vessels, where excess supply is having an impact on valuation — and the loans that are tied to those falling ship values.
Uncontrollable Events. Floods in Australia, bad weather in the Southern Hemisphere, a decline in China’s iron ore imports and pirates in the Gulf of Aden are just a few of the many wild cards that can have a negative impact on dry bulk shippers’ earnings.
Bottom Line: As dry bulk shippers continue to sail into choppy waters, the short-term winners may be companies whose fleets boast smaller, more versatile vessels. At half the size of the capesize, the supramax can economically move grain — a market likely to experience a bounce this year. Genco Shipping & Trading is well positioned to profit from the versatility advantage. The same can be said for Eagle Bulk Shipping, despite its exposure to Korea Line Corp., which filed for bankruptcy last month.
But size isn’t everything. Even though Navios Maritime Holdings (NYSE: NM) and DryShips Inc. (NASDAQ: DRYS) have capesize vessels in their respective fleets, analysts believe both companies may be undervalued now and may present an opportunity for investors.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.