Tanker Shipping Rates Aren’t Covering Costs

by Susan J. Aluise | February 7, 2012 10:00 am

“Beware of the little expenses,” Benjamin Franklin once said. “A small leak will sink a great ship.” If our witty Founding Father had a long position in shipping stocks today, he’d take one look at the yawning gash in vessel charter rates, grab a life vest and take his chances on the open sea.

The Baltic Dry Index which measures the average daily rate to ship raw materials such as iron ore or coal, has sunk by more than 65% in the past two months, sending ship operators’ earnings reeling. As recently as Dec. 12, the index stood at 1,930; today it stands at a mere 648 — the lowest level since 1986. Read about the specific causes of ship operators’ woes here[1].

Although those numbers are bad on their own, they don’t come close to reflecting the havoc the sector has endured in recent years. Rates have fallen so far so fast that the cost of operating many vessels exceeds the daily charter rate.

Finding itself between the devil and the deep blue sea, Cyprus-based Global Maritime Investments last week offered grain shipper Glencore International a deal it couldn’t refuse[2]: free charter of a Panamax ship, plus $2,000 a day toward the shipper’s fuel costs for the first 60 days of the voyage.

A deal that lets Glencore haul grain from Asia and Australia to Europe for free — and requires the operator to cover gas money for the first two months — seems nuts. But those are headwinds ship operators are struggling with now.

Pacific charter rates are sinking so fast that operators are scrambling to reposition their vessels to better compete for work. Had Global Maritime not taken on Glencore’s grain, it would have had to sail the seas on its own dime to compete for charters in the Atlantic. And fuel costs alone amount to tens of thousands of dollars a day.

Earlier this month, a Denmark-based shipowner chartered a Supramax vessel to haul gypsum from Europe to the U.S. for fuel costs alone[3]. Some operators are trying to lower fuel costs by slowing down; other operators are simply anchoring ships in hopes of riding out the storm.

That’s a far different picture from just four years ago. In early 2008, the Baltic Dry Index hit nearly 12,000 — and daily charter rates for the largest vessels and hottest routes topped $200,000 a day. That prompted many shipping companies to place huge orders for new ships. But by the time those new vessels began to be delivered, the economy had tanked, and there were too many ships sailing after too little cargo demand. Today, capesize bulkers that haul iron ore and coal rent for as little as $5,500 a day.

The odd thing is, if you looked at major dry-bulk shipping stocks on Monday, you’d think the sector was on top of the world, not circling the drain. Shipping stocks defied gravity on Monday, with Baltic Dry Index components such as DryShips (NYSE:DRYS[4]), TBS International (NYSE:TBSI[5]) Excel Maritime (NYSE:EXM[6]) and Paragon (NYSE:PRGN[7]) surging with double-digit gains.

 Chalk up that wild performance to a one-point rise in the BDI[8]. But investors know the seas are still scary — that’s why by midday Tuesday, companies such as TBSI had given up those gains and more.
Before you trust any big gains in this sector, there are a couple of caveats: First, stocks that are trading for pennies — or at the high end, $1.50 to $3.00 — can post eye-popping daily gains without breaking a sweat.  Second, there’s the “how much lower can it go?” rationale, which does have some merit.

For example, TBSI was riding high in October 2007 at $71, lost half its value in nine months and kept falling, hitting $4 a year ago. With a few interruptions, TBSI continued its rapid plunge, to a low of 15 cents at the beginning of the year.

On Monday, the stock skyrocketed 77%, from 22 cents to 39 cents. But by midday Tuesday, the bears were devouring the stock again — TBSI had fallen more than 60%, to a mere 14 cents. That gives a global shipping company with a 52-vessel fleet a market cap of just $4.4 million (yes, million).

That pattern has been repeated to a great degree with DRYS, EXM and PRGN, which averaged gains of about 15% on Monday. But the three companies also are trading well below their 52-week highs (49%, 66% and 80% below, respectively).

The bottom line: If you look at valuations on dry-bulk shipping stocks — and how far their fortunes have fallen over the past couple of years — they look like bargains. But these companies continue to sail challenging seas, and not all of that adversity has been priced in yet. That volatility alone can eat your lunch.

Still, if the timing and price are right, even Poor Richard might see the value in shorting the stocks named above.

As of this writing, Susan J. Aluise did not hold a position in the stocks named here.

  1. here: https://investorplace.com/2012/01/3-shipping-stocks-with-suspect-dividends/
  2. a deal it couldn’t refuse: http://www.businessweek.com/news/2012-02-06/glencore-gets-free-ship-with-fuel-discount-on-rates.html
  3. chartered a Supramax vessel to haul gypsum from Europe to the U.S. for fuel costs alone: http://www.bloomberg.com/news/2012-02-03/commodity-ship-is-hired-at-zero-cost-as-freight-rates-plunge-63-this-year.html
  4. DRYS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRYS
  5. TBSI: http://studio-5.financialcontent.com/investplace/quote?Symbol=TBSI
  6. EXM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXM
  7. PRGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRGN
  8. a one-point rise in the BDI: https://investorplace.com/2012/02/shipping-stocks-dryships-drys-verizon-coinstar-netflix-chux/

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