Has Dry Bulk Shipping Reached Low Tide?

By Stephen D. Simpson, CFA | February 13, 2011 AAA

It is easy to make a bunch of "perfect storm" references to the dry bulk shipping industry these days. Serious floods in Australia, Indonesia and South Africa have created major problems for suppliers, as have commodity export bans in countries like Russia and India. On the flip side, China's desire to control inflation has investors worried about the state of iron ore demand. If that all was not enough, shipping companies continue to order new vessels and refrain from scrapping older ones, and a major chartering partner (Korea Line) recently declared bankruptcy.

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All of this has wreaked havoc on shipping prices. During the week of Chinese New Year, spot rates for the monstrously large Capesize vessel class troughed at around $5,000 a day - a level that is below the daily operating costs of even the most efficient operators and dramatically lower than the average of approximately $33,000 seen in 2010. And it is not just the Capesize vessels seeing tough times - Capesize is down the most, but every category is down from fourth quarter levels (with Handysize faring the best). (For more, see Is Dry Bulk Shipping All Dried Up?)

What Is An Investor To Do?
Investors should probably invest with an eye towards safety. It is all well and good to own riskier operators when rates are climbing (in fact, lower-quality companies tend to seriously outperform then), but this troubled environment could last for a few years and the halcyon days of $100,000+ spot rates for Capesize vessels is a long time ago (2007, to be exact). If daily spot rates are low, it makes sense to gravitate towards companies with more of their vessels under contract and/or those who can profit even in low-rate environments. By the same token, debt can become a lethal deadweight during market troughs, so investors should keep an eye on the balance sheet.

Genco (NYSE:GNK) is fairly efficient as an operator, with relatively low operating costs. It does have more than 60% exposure to spot rates, but less than 10% of that in the Capesize category. This could be an interesting play for aggressive investors wanting a company with strong earnings leverage to an eventual recovery.

Eagle Bulk Shipping (Nasdaq:EGLE) had about 25% of its charters exposed to Korea Line and the company has been taking on debt to expand its fleet. The company has about half its fleet exposed to spot rates but no Capesize exposure - Eagle specializes in running the ultra-versatile Supramax class of vessels and rates here have held up better (though are still down severely). (For related reading, see Size Matters In Shipping.)

Diana Shipping (NYSE:DSX) might be the relatively safer play - the company has very low financial leverage and can use that to take advantage of low asset prices and other operators' distress. Moreover, a low spot exposure (17% total, 7% Capesize) adds some safety.

Baltic Trading (Nasdaq:BALT) is the high-risk play. Managed by Genco, the company's balance sheet seems in good order, but it is solely a spot-rate operator and has significant exposure to Capesize rates.

Navios Maritime (NYSE:NM) is not the most efficient operator, but the company has good liquidity and good time charter coverage for 2011. Navios presently operates only a few dry bulk ships (in the Panamax class), with a slew of Handymax on order; the bulk of Navios' business is in tankers.

DryShips (Nasdaq:DRYS) is in a challenging spot. Though the company has low spot exposure (less than 20% total, and only 2% in Capesize), the company's operating costs are high and the company's ultradeepwater rig business (drillships) is unproven. Then again, aggressive investors could look on this name as a chance to leverage bounces in both shipping and offshore drilling.

Safe Bulkers (NYSE:SB) boasts very low operating costs and low spot exposure for its relatively young fleet, while Excel Maritime (NYSE:EXM) has a higher spot exposure (more than 60%), but relatively low in the Capesize class.

The Bottom Line
A strong global recovery will be good for shippers, but only if new supply growth stays below a level that can allow rates to rise. Aggressive investors can certainly place their bets today on spot rate recoveries, but should keep an eye on operating costs and debt levels. (For more, see Shipping Stocks Stayed Docked In 2010.)

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