“It was the best of times, it was the worst of times,” novelist Charles Dickens famously wrote. But for dry bulk shippers, there are precious few harbingers of good times. It’s not news that the dry bulk shipping sector is riding low in the water these days.
But there have been some hopeful signs of resurgence in recent weeks – most notably, rising Asian commodity prices. This has been viewed as a favorable trend for the industry. Indeed, experts expected a rebound in the sector driven by strong Chinese demand for commodities such as iron ore, steel and coal. The task of rebuilding Japan after the March earthquake, tsunami and earthquake also requires vast quantities of such commodities – which move primarily by ship.
But that bright light of hope for a rapid recovery of shipper’s fortunes has begun to dim. Even the jump in Asian commodity prices hasn’t been enough to offset falling spot vessel rates. Not only have spot rates failed to rebound as commodity volume has increased, rates have sunk below peak recession levels. That doesn’t bode well for the sector’s near-term prospects.
The numbers confirm the challenges. The Baltic Dry Index (BDI), which measures how much it costs shippers to move raw materials by sea, has fallen by nearly 65% over the past year – even as other economic indicators have risen in the post-recession recovery. Since commodity prices have taken a bounce, shipping rates are not slumping because global trade has dried up.
So why is the sector struggling? Simply put: the law of supply and demand. Between 2006-2008, ship owners placed hundreds of new orders for ships, particularly the large capesize vessels used for transporting coal and iron ore on long-haul Far East and Australia routes. In fact, the global shipping fleet still increased by nearly 20% last year. As a result, there is too much shipping capacity chasing too little cargo.
Not surprisingly, shipping rates began to plummet – on the spot market, rates have fallen by as much as 80%. Long-term charter rates that were locked in two-to-three years ago have fared better, but are still dangerously low. The shipping glut also has gutted ship values, further eroding earnings.
Plus, there are new indications that China’s economy is slowing down. Combined with the other factors, it’s a good bet that the dry bulk shipping market is likely to face stiff challenges for the near term.
That having been said, if you want to make a play in the dry bulk shipping sector, some stocks are better bets than others. Here are 2 potential hits and 2 potential misses:
Hits:
Navios Maritime Partners (NYSE:NMM). Navios set a new 52-week high of $21.56 on April 29 and is trading about 12% off that high today. Even in a tough sector, the company has been able to grow its fleet economically and has comparatively strong fundamentals.
Diana Shipping (NYSE:DSX). Diana’s long-term contracts and conservative fiscal management make it a good bet. The company is off about 20% from its 52-week high of $14.23 last November. With a return on equity of 11.79%, Diana also offers upside.
Misses:
TBS International (Nasdaq:TBSI). Delicately put, TBSI is having a tough year. The company’s first quarter loss of $16.7 million was more than double its net loss for the same quarter in 2010. With $381 million in liabilities compared to $81 million in assets – and tough negotiations with lenders underway – the company may struggle to stay afloat as an independent entity.
Genco Shipping (NYSE:GNK). Genco is another company that has struggled with earnings-battering headwinds ranging from Australian floods to lower Chinese commodity shipments. The company, which is trading around $6.82, is down more than 62% from its 52-week high of $20.01 last May. While the company has a far stronger cash position than does TBSI ($300 million in assets vs. $121 million in liabilities looks good too), there are still reasons to be cautious about GNK. Foremost among them: the addition of 13 new vessels into its fleet could make it more vulnerable to a slowdown in China’s economy.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
