Like an ant crawling through the Chunnel, dry-bulk shippers have found the perfect storm of vessel oversupply and disrupted trade patterns to be an arduous journey through the darkness.
The industry is not out of the woods yet, as scheduled deliveries of new vessels are set to peak during 2011 with a potential injection of 120 million DWT (deadweight tons) into the worldwide fleet.
However, some 40% of scheduled deliveries during the first nine months of 2010 appear to have been cancelled (rather quietly, I might add). This strongly suggests a state of growing financial distress among some debt-laden operators, as falling vessel valuations and meager charter rates take their cumulative toll.
Steaming for brighter days
For operators that have prepared for opportunistic growth at the peak of distress in their industry, that degree of "slippage" in the 2010 order book to date offers a glimpse of light at the end of this long, dark tunnel. Purpose-built by Genco Shipping & Trading
Baltic has formulated a dividend policy that breathes some fresh air into the tunnel. The company will distribute to shareholders all net income less fleet-related capital expenditures such as drydocking and survey costs (excluding acquisitions). While that may make for a more variable yield going forward than the current annualized rate of 5.7%, I think Fools will agree that the formula grants investors one of the more direct means of participating in a rising spot-price environment when it does eventually come.
Baltic's parent company, Genco, added 14 new vessels to its time-chartered fleet during the third quarter, which sufficed only to lessen the 9% blow to diluted earnings-per-share as the shipper's average charter rate fell 12.8%. When earnings per share contracts during a 27% revenue expansion, you know you're operating in a difficult business environment. Genco's reliance upon long-term charter contracts, which provided a crucial cushion during this period of declining rates, will likely feel like a deadweight once conditions improve and rates rebound.
However, Genco does possess a structural strength in the composition of its fleet, which I believe will help to offset the potential lag effect of time-charter exposure. Smaller Handysize, Handymax, and Supramax vessels are very well-represented within Genco's fleet, corresponding to 68% of the overall vessel count and 43% of the fleet's total tonnage. The global supply glut appears decidedly more acute among larger Panamax and Capesize vessels, while smaller vessel categories have seen an inordinate share of scrapping activity to date.
Dawn breaks on growing demand
As Baltic Trading points out, a noteworthy growth spurt in global production of iron ore and other bulk products may await the industry at the end of the tunnel. Although Vale
China, for its part, is not inclined to take chances when it comes to preparing for that kind of growth. The nation's recent creation of a $5 billion fund, available to Greek shippers that are building vessels in Chinese shipyards, provides a welcome bridge of support to see the industry through to the time when growing bulk commodity demand catches up with vessel supply.
In other words, the very same forecasted demand for bulk products from China, India, and emerging economies that has this Fool feeling resolutely bullish about producers like my top coal pick Peabody Energy
I have chosen Diana Shipping and Baltic Trading for a two-pronged exposure to long-term recovery in the dry-bulk industry, and I am eager to hear whether some of my fellow Fools are also patiently long in the dry-bulk space. Please share your thoughts in the comments section below, and consider revealing your picks to the community by adding them to your CAPS portfolio. To track more Foolish analysis of the industry, enter the relevant tickers into your watchlist.
