Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Too Many Ships Destined for the Seas

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The legendary swordfisher Andrea Gail was not devoured by the first waves of the perfect storm. Sometime between the last communication and the tragic end, the waves grew from 30-foot monsters to heights we can scarcely imagine.

The world's entire fleet of cargo vessels has faced a huge demand disruption since the global financial crisis hit last year. Having properly described the initial 93% collapse in the Baltic Dry Index as a perfect storm, and after dubbing an early bankruptcy and nullified contracts a rogue wave, I find only one remaining metaphor to convey the enormity of the challenges ahead.

A tsunami looms ... one that will fundamentally change the face of the global shipping industry.

The quake that generates the wave
Like tectonic plates grinding against each other with seismic consequences, a monumental shift between the supply and the demand of cargo vessels has shipping operators hiding under the table.

The seeds of this crisis were sown in the very vibrancy of the boom years that preceded the fall. China's seemingly insatiable demand for raw materials like coal and iron ore stemmed from a thriving market for trade goods exported to the U.S. and Europe. From Dubai to Mumbai, emerging economies presented underserved markets that shippers raced to address. Miners like BHP Billiton (NYSE: BHP  ) and Peabody Energy (NYSE: BTU  ) expanded operations accordingly, and at shipyards around the world, the orders for new vessels piled in.

As a result, 146 new Capesize bulk carriers will join the fleet this year alone, representing a 28% expansion of global capacity just as world trade is expected to decline by 16%. Supply and demand are moving in fundamentally opposing directions, and new ships are set to roll down the spillways for some time. The number of Capesize vessels delivered in 2010, in fact, will outpace even 2009's record expansion.

In a recent survey, industry analysts project a 50% decline in the Capesize charter rate to about $18,000 per day before the year is through. Given this clear evidence of a massive oversupply of these bulky bulkers, I was critical of the decision by Navios Maritime (NYSE: NM  ) to add four additional vessels to its pipeline.

Fools will recall that Diana Shipping (NYSE: DSX  ) President Anastassis Margaronis sounded the siren back in May, warning of a "disaster for the shipping markets" unless vessel orders were scrapped. With a perspective reflected in his company's defensive posture, he added: "the challenge for most shipping companies will be to survive over the next two years or so."

China's strategic move to stockpile essential commodities -- while prices remained severely depressed by a disrupted global marketplace -- appears to be waning. China's copper imports in July were 23% lower than in June, and iron ore imports are expected to decline 16% from recent levels. I expect foreign investments like the 17% stake in Teck Resources (NYSE: TCK  ) to continue, but recent import volumes were simply not sustainable at this stage.

Uncontainable damage
My colleague and Editors Desk Blog contributor David Williamson brought a fascinating article to my attention through his recent post Ghosts of Christmas Future. According to the report, 12% of the world's containership fleet is sitting idle, and a massive flotilla of anchored vessels off the coast of Singapore stands as a powerful symbol of a sea change in global trade. That idled capacity is expected to reach 25% of the total sometime during the next two years.

With a global order book for 5.3 million TEUs (a TEU is the capacity of a standard intermodal container) -- or nearly half the existing worldwide container fleet -- the oversupply is very severe. German giant Hapag-Lloyd was already facing possible bankruptcy, and Maersk calls it "a crisis of historic dimensions."

Ships can sail over a tsunami in mid-ocean without knowing it, because the monster only rears its head when it approaches a coastline. The devastating impacts will be felt ashore by the shipowners, the operators, the brokers, the shipyards, and the banks that make it all possible.

At its core, the shipping tsunami is a banking crisis in disguise. Diana Shipping's Margaronis also warned of a "wave of destruction for banks to rival the subprime crisis." In this world of interconnected leverage, I believe that the tsunami will first make landfall in maritime financial centers like Hamburg, Germany, and London before flooding spreads inland through derivatives. HSH Nordbank may consider risk reserves at 1% of lending sufficient, but this Fool does not. Heavily indebted operators like DryShips (Nasdaq: DRYS  ) and Excel Maritime Partners (NYSE: EXM  ) may find it very difficult to service their debt as charter rates tumble, and if there is a shipping company that files for bankruptcy protection, I believe it could have a powerful domino effect.

I maintain my decidedly cautious approach toward investing in the shipping sector. With ample liquidity, low exposure to spot-market volatility, and a sober view of the challenges ahead, I continue to view Diana Shipping as the best-positioned operator to withstand the challenges.

The Dry Bulk Shipping tag in Motley Fool CAPS lists 17 companies. Join our online community today and share your views on the offerings in this sector. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts somewhat smaller than dry bulk carriers. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Diana Shipping. The Motley Fool has a seaworthy disclosure policy.

Read/Post Comments (6) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2009, at 7:33 AM, sean89928 wrote:

    Nice article, a bit too much hyperbole but good anyway.

    I don't see why you would criticise Navios for the 4 new Capesizes, since they are all contracted out at between 5 & 10 years at rates well above operating cost (including loan repayments), and all of those contracts are insured in the case of default.

    In true essence, Navios have no risk from a downturn in the shipping spot market, and are only at risk off losing upside should the BDI ever fly up above $50,000 per day again.

    I personally think the recession is over but that many companies who should have gone bankrupt have not yet done so, and as the next couple of years play out I expect to see those companies file chapter 11. This will be more noticeable in the shipping sector for the reasons you pointed out (hugely overheated BDI in 2008, with 2 year waits between committments and receipt of ship orders).

    If the BDI stays low then there will be a slow breakdown of ship-builders and shipping companies. If the respective governments backstop the ship builders as previously seen, then that will mean that the ships will still go out to sea which will cause the BDI to drop and shipping companies to hit the wall quicker and harder.

    Navios will remain strong.

  • Report this Comment On September 19, 2009, at 1:02 PM, IIcx wrote:

    Good article as far as it goes; see

    Which shipping sector(s) are you referring to?

  • Report this Comment On September 21, 2009, at 1:34 AM, Ecomike wrote:

    I think you have a few of your facts way off. I just read yesterday an interview with the head of dryships, who said the number of delayed builds and cancelled orders has made a huge dent in that 146 Capex ships you are claiming will hi the water this year.

    Also it seems that China has switched to importing more iron ore from south America, after Rio Tinto POd the Chinese at the last minute and did not sell part of the Australian iron ore operations to China. Most of the Capex excess demand is used shipping iron ore to China from Australia, and the Capex ships are too big for the Panama Canal. In case you had not noticed (or chose to ignor it?), the other 2 vessels charter rates have been climbing while the Capex ship rates fell. Only one reason for the current drop. China took advantage of the demand vacuum earlier this year, and bought low and stock pilled which pusshed Capex rates up quickly, then turned off the spiget to punish Rio Tinto, for double dealing. Dryships CEO says that stock pile will need restocking in about 8 weeks.

    Also, one should note that the rates we see right now are rates we saw for extended periods as recently as 2005, a time when many of the companies thrived.

    OK, so you say 12% of the worlds containership fleet is idle, Hmm, that means that 88% is not idle in the middle of the worse recession since the Great Depression. That does not sound like the end of the world to me.

    I think Chhina has cut back imports right now the check the recent rise in prices due their hording earlier this year, and they had the inventory on hand to pull this off.

    You might have done better just to say, I own stock in Diana Shipping and think you should invest in it too..... instead of trying to scare investors away from good drybulk shipper stocks who should also survive and do well like EXM and NM, NMM all who are selling at very low PEs compared to Diana Shipping which I think is already over priced. By the way, NM and NMM still have dividends. EXM has sold stock and raised capital twice in the market recently to improve its liquidity. Also, NM is a substancially diversified company, not just a DB shipper.

    The biggest risk in owning Dryships is the CEO.

    Lastly, I think we are past the bank domino effect risk. World governments are not going to let it happpen. I think stock for ship mergers, and under the table back door sales of stock to increase liquidity, (which dilutes earnings for stock holders) are far more likely, which will line the banks pockets with new deals. With LIBOR at unheard of rates, M&A may be the order of the day.

  • Report this Comment On September 21, 2009, at 2:06 AM, XMFSinchiruna wrote:


    The 146-vessel figure was cited from a Bloomberg piece dated Aug. 31. I'd like to see verification of Curious George's claims before updating such a datum.

    I have consistently highlighted NM as a solid operator, but found the latest addition of four more ship orders excessively counter-cyclical for my taste ... even with the pre-inked contracts and contract insurance ( which would mean about as much as monoline insurance meant for MBS dealers if we had anything resembling a domino effect in the industry).

    Insights from within the manufacturing sector are suggesting a longer pause in the China stockpiling effort that the 8-week estimate you cite from Curious George.

    There is more pain ahead for this entire industry. I don't believe this is a good time to seek broad exposure. It's a great time to watch closely for more favorable entry points on well vetted operators that are low on debt.

  • Report this Comment On September 21, 2009, at 7:34 AM, IIcx wrote:

    Even with NG so low, the LNG shipping play looks very attractive to me. New terminals are coming online this year and its the season.

    Even with reduced demand, oil tankers should also do well.

    Maybe I'm missing something?

  • Report this Comment On September 23, 2009, at 8:55 AM, imacg5 wrote:

    George Economou stood up last year at this time and said "We are not in breach of loan covenants, we do not expect to become in breach of loan covenants, and we don't need to raise cash,"

    That was followed by the company going into breach, and a massive dilution.

    The source of reliable information about the growth of the fleet should be the independent publications who have been covering the shipping business for 50 years, and have no skin in the game except to maintain their integrity. They all say the dry bulk fleet will grow well ahead of demand through 2012.

    They are the ones who said the brief run of the BDI in May was unsustainable, and that the BDI would fall through the summer. Which is exactly right.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 988012, ~/Articles/ArticleHandler.aspx, 10/22/2016 5:40:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 20 hours ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:02 PM
BHP $34.96 Down -0.06 -0.17%
BHP Billiton CAPS Rating: ***
BTUUQ $10.59 Up +4.32 +68.90%
Peabody Energy Cor… CAPS Rating: **
DRYS $0.36 Down -0.03 -7.23%
DryShips CAPS Rating: **
DSX $2.51 Down -0.02 -0.79%
Diana Shipping CAPS Rating: ****
EXMCQ.DL $0.00 Down +0.00 +0.00%
Excel Maritime Car… CAPS Rating: ****
NM $1.18 Down +0.00 +0.00%
Navios Maritime Ho… CAPS Rating: ***
TCK $20.50 Up +0.17 +0.84%
Teck Resources CAPS Rating: ***