Rising Rates Have a Different Meaning for Each Dry Shipper

The Baltic Dry Index (or BDI) is a basket of ship sizes and routes that reflects the change in spot shipping rates for dry shippers. It has roughly tripled so far this year along with the stock prices of many dry shippers, in part due to increased demand and deliveries of iron ore and coal to China and Japan. Unfortunately, the spot rate is only as valuable as a shipping company's ability to capitalize on it.

In order to determine the degree a company can capitalize on rising rates, you need to study its ships' contract terms and expiration dates. The more ships that are either no longer under contract or operate based on the daily spot rates, the more meaningful the daily rate change is. You can typically learn this vital information that usually displayed in charts within the earnings reports and 10-Q and 10-K SEC filings.

Long-term contract example
Take DryShips (NASDAQ: DRYS  ) as an example. As of July 31, it had a fleet of 42 dry ships (including newbuildings), including 12 of the most currently lucrative Capesize vessels. However, 11 out of 12 of its Capesize are locked in fixed-rate, long-term contracts. Four of them won't expire until mid-2014 at the earliest; the seven are locked down until 2018 or longer.

Fixed-rate contracts are unaffected by daily spot rates. While the surge in Capesize rates in 2013 is an encouraging start, it will have little effect on DryShips for years to come. Furthermore, it's difficult to even guess what the rates will be by the time the contracts expire.

On the other hand, DryShips also operates 28 Panamax-size ships (including 4 on the way) and 2 Supramax ships. All but three of them either already charter at the spot rate, or have contracts that expire this year. When analyzing DryShips in light of the surge in rates, you should focus more on the Panamax and Supramax rates, since they'll have the greatest influence on DryShips' revenue and earnings for the foreseeable future.

Shippers with greater spot-rate exposure
Baltic Trading Limited (UNKNOWN: BALT.DL  ) and Genco Shipping & Trading Limited (NYSE: GNK  ) are two examples of shippers that operate almost exclusively based on spot rates. Baltic Trading currently operates 11 dry ships that include two Capesize, four Supramax, and five Handysize vessels, and all of Baltic's ships operate based on spot rates. This means each daily move in the BDI, especially its individual ship components, will have an immediate effect on its revenues, earnings, and cash flow. Investors should pay attention to the daily spot rate changes for each of the ship sizes above, since Baltic owns no Panamax ships (which is 25% of the BDI).

Genco Shipping currently operates 53 dry ships, comprising nine Capesize, eight Panamax, 17 Supramax, six Handymax, and 13 Handysize vessels. All of the Capesize and Panamax ships operate based on spot rates, and all but 4 of the others are either at spot rates or have contracts expiring in 2013. While Genco's fleet isn't divided evenly among the four sizes of the BDI, the index can give you a good rough idea on the direct financial impact on Genco's operations. To help you analyze Genco, you could start by watching the BDI, but then follow up by examining the individual rates of each the four ship sizes within the BDI.

Looking at other shippers
Remember that Capesize rates will only affect Baltic and Genco, Panamax rates will only affect DryShips and Genco, and Supramax and Handymax rates will affect all three.

Of the three examples in this article, Baltic Trading is the one most likely to see its fortunes swing the most by a change in daily spot rates.  Not only are none of its ships under fixed-rate contracts, but its fleet is less diversified compared to DryShips and Genco because it only has three kinds of ships, while the other two have four.  

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