The Dark Days of Dry Bulk

Someday, the sun will rise once more to warm the ice-bound fleet of the world's dry bulk shippers. But that day has not arrived.

Diana Shipping (NYSE: DSX  ) must be thankful this week to be able to report a profit under these tough circumstances. The company exceeded analysts' expectations with both its third-quarter earnings of $26.4 million (a 22% decline) and resilient revenue of $64.6 million. But the shipper is well-aware that -- barring a miraculous improvement in the current outlook for the industry -- the waters are bound to grow more frigid.

Diana clings to countercyclical profitability on the strength of some remaining long-term charter contracts inked during the pre-collapse glory days of the dry bulk industry. The shipper's Capesize vessel Norfolk, for example, continues to generate $74,750 per day in charter revenue, and that lucrative contract extends to January 2013. But as time ticks on and the global fleet continues to grow far faster than baseline demand, those contracts are rolling over into replacement charters that pale in comparison.

On a consolidated basis, Diana's 11.5% year-over-year decline in its average daily charter rate appears relatively mild. With an attractive portfolio of even longer-term charters in place, Navios Maritime Holdings (NYSE: NM  ) shed only 7% from its prior-year average charter rate. But to grasp the broader market reality and its impact on one of the industry's top-notch operators, you have to dig into the individual contracts. Diana's Capesize vessel Boston, for example, recently ended a charter contract with a subsidiary of BHP Billiton (NYSE: BHP  ) that was priced at $52,000 per day, and entered a new charter that will bring in 73% lower daily revenue at just $14,000 per day! Back in August, Diana's Panamax carrier Protefs replaced a prior contract generating $59,000 per day with one priced at just $11,750 (an 80% haircut).

As the dry bulk industry's crisis extends, the insulation that carriers like Diana enjoyed from long-term charters during the industry's boom cycle is stripped away. DryShips (Nasdaq: DRYS  ) has 54% of its dry-bulk capacity locked in at an average rate of about $35,000 per day for 2012, but the glaring disconnect between that by-gone bonanza and the current going rate gives investors ample cause for concern. Fortunately, less-insulated operator Genco Shipping & Trading (NYSE: GNK  ) has already shown that it's possible to operate profitably even amid this unthinkably weak charter-rate environment.

I wish I could say brighter days were imminent on the horizon for dry bulk shippers. As an embattled investor in the sector myself, I continue to wait patiently for a clearing of the excess inventory and the improved rate environment that will eventually follow. For now, however, I hold little hope that such balance will be achieved during 2012, and I encourage Fools to approach the space with considerable, even extreme, caution. My 2010 CAPScall of Diana Shipping has underperformed the S&P 500 (INDEX: ^GSPC  ) by an eye-popping 55%! I will continue to keep a close eye on the industry for early signs of improvement, however; and I encourage Fools to track my coverage of this and other commodity-related sectors by bookmarking my article list here. I look forward to reading your thoughts on the dry bulk space in the comments section below.


Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping and DryShips. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 28, 2011, at 11:23 AM, Hamiltionian wrote:

    Thanks for your article. I find the shipping industry very interesting. I think that there are aspects of the businesses mentioned in this article in particular that the market is overlooking.

    First, with Diana Shipping, and similarly with the sister company Diana Containerships, the companies are in a very strong financial position relative to their peers. They currently use very little leverage for the industry. Diana Shipping for example has more cash than debt and many unmortgaged ships. They plan to use their buying power over the next couple years to accumulate vessels at low prices and buy back stock. I think the value-oriented management has done a great job in positioning the company to take advantage of the current situation.

    DryShips management is not so good, but they own 75% of Ocean Rig, a deepwater driller. The current market value of that stake is currently worth more than the whole DryShips company, so clearly there is a pricing discrepancy. Ocean Rig has a large order backlog and should mint money for quite some time.

    At any rate, I think this terrible situation has also created some opportunities. I am long DCIX, DSX, and DRYS.

    -David

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