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Are Dry Bulkers Catching a Falling Knife?

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Most of us have done it before. You observe a sector being torn to shreds, you conclude that it couldn't possibly grow any weaker, and you hop in with a confident strut. My hands are still injured by a couple of the falling knives I picked up during the epic commodity sell-off of mid-2008.

My concern for dry bulk shippers at the moment is that several of the best-known operators may be exposing their hands to fresh cuts as the vessel oversupply condition facing the global fleet continues to intensify.

Take Genco Shipping & Trading (NYSE: GNK  ) , for example. In its quarterly earnings report this week, Genco reiterated its tally of recent vessel purchases: consisting of 13 Supramax vessels (in the 50,000-dwt range), and five Handysize vessels (in the 30,000-dwt range). Of these 18 ships, only three have been delivered and entered into charters, while the rest are pending for delivery through 2011.

To be sure, vessel prices have fallen dramatically since the perfect storm battered the sector: At $33.8 million per Supramax vessel, Genco is paying less than half of what Star Bulk Carriers (Nasdaq: SBLK  ) paid for a comparable 3-year-old vessel in May of 2008. Both Star Bulk Carriers and Navios Maritime Holdings (NYSE: NM  ) paid about $54 million each for 180,000-dwt Capesize vessels in the spring of 2010, while back in September of 2008, Navios paid twice that price.

Roughly speaking, then, the industry's vessel acquisition costs have been chopped in half as oversupply has stunned the market and charter rates have run aground. Naturally, operators perceive bargains in these prices and have moved aggressively to grow their fleets.

Genco even launched an IPO in March -- called Baltic Trading (NYSE: BALT  ) -- to purchase vessels and operate them on the spot market. After watching those new shares fall more than 25% from their initial price, I grabbed a piece of that potential blade myself. Baltic Trading has already acquired nine vessels (six delivered), and recently announced a follow-on offering of $110 million to pay down debt. I expect a bumpy ride with Baltic Trading, but beneath $11 per share I couldn't resist the apparent bargain.

But, you see, herein lies our collective dilemma. For investments in this industry to bear fruit, we rely upon these operators to expand their fleets at or near a bottom in this dreary dry bulk business cycle. But while aggressive growers like Eagle Bulk Shipping (Nasdaq: EGLE  ) and Genco Shipping & Trading leap outward with an expansionary zeal, the ever-conservative Diana Shipping (NYSE: DSX  ) continues to bide its time. Diana sees "further pressure on charter rates and vessel values" forthcoming, and so has opted not to initiate its long-anticipated buying spree in earnest.

Only hindsight can discern a bottom from a falling knife. Here's hoping we can all keep our hands safe. How confident do you feel that the sector has found a comfortable bottom in the cycle? Please sound off in the comments section below, and vote in our Motley Poll.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Baltic Trading and Diana Shipping. The Motley Fool's disclosure policy can hold its breath underwater while a cargo ship passes overhead.

Read/Post Comments (3) | Recommend This Article (10)

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 August 11, 2010, at 4:13 PM, CPACAPitalist wrote:

    You should probably give bullishbaboo a credit somewhere here since i'm willing to bet his blog is where you got the idea for your article and likely some of the information presented here.

  • Report this Comment On August 11, 2010, at 5:16 PM, XMFSinchiruna wrote:


    Although I did happen to see the blog post you mention, it played no role whatsoever in the origination or formulation of this article.

    I cover earnings for the dry bulkers for TMF, and this article forms part of my original analysis of the sector's dynamics over the course of the past 2+ years.

    Speaking of bullishbabo, however, he is due congratulations for his position at the pole position of a very skilled community of investors. :)

  • Report this Comment On August 11, 2010, at 5:48 PM, CPACAPitalist wrote:

    Lol, I was mostly being facetious. I thought it was a good article on a often overlooked sector. Anyone who wants to see more discussion should check out Bullishbabo's profile and recent blog with its associated commentary. I agree that Bullishbabo does deserve congrats, i'm proud to be one of the many CAPS members he is thrashing on a daily basis.

    Fool On!

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Related Tickers

12/31/1969 7:00 PM
BALT.DL $0.00 Down +0.00 +0.00%
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