Will Dry Shipping Cool Off Before it Heats Up Again?

Companies such as Genco Shipping & Trading (NYSE: GNK  ) , Baltic Trading Limited (UNKNOWN: BALT.DL  ) , and Safe Bulkers (NYSE: SB  ) agree that we are in the early innings of a rebound for the dry shipping industry. As such, most of these companies expect to see improved rates, revenue, and profits in 2014 on beyond. While this is encouraging in the long term, ample evidence suggests that the industry hasn't quite hit bottom yet.

Genco Shipping & Trading
Genco Shipping & Trading refuses to take on long-term fixed rates. It believes its best strategy is to operate based on spot rates, which it believes are headed higher. In its Nov. 6 earnings release, CFO John C. Wobensmith called it an "opportunistic time charter approach." He expects rates to improve -- and Genco Shipping & Trading's earnings potential to improve with them.

Wobensmith expanded on this outlook in the conference call. He explained that Genco expects rates to rise due to "positive long-term demand for the global transportation of iron ore, steel and other core commodities."

While company representative Apostolos Zafolias agrees on the long-term strength, he offered some clues that point to short-term industry weakness. First, he warned that every fourth quarter since 2010 has proven to be a peak in iron ore exports from Brazil. Wobensmith later added, "I think it's fair to say that seasonally, first quarter should be a little softer."

Baltic Trading Limited
Baltic Trading Limited didn't mention much about the rate environment outlook in its earnings release on Nov. 6. However, in its conference call, it forecasted "further improvement in the prevailing rate environment." Baltic put its money where its mouth is and declared a dividend.

Like Genco Shipping & Trading, all of Baltic Trading's fleet trades based on the spot market rather than fixed-rate charters. Baltic Trading believes "iron ore trade continues to be a focal point of dry bulk trade as demand for steel continues to drive increase the imports of the commodity into China." It expects supply growth to be limited through 2015 at a minimum, further adding to higher shipping rates as demand pressure increases higher than supply.

Baltic Trading also sees "a little bit of softness in the first quarter" and also noted that bad weather has driven down rates in the first quarter in years past -- which means it could always happen again.

Safe Bulkers
Safe Bulkers reports its results on Nov. 4. Just like Genco and Baltic, Safe Bulkers has been increasing its exposure to the spot market, since it believes long term rates will rise. It confirmed this belief by declaring a dividend, which Safe Bulkers says "reflect[s] the improving climate in the charter market." President Dr. Loukas Barmparis called the environment "an early stage of the forthcoming shipping cycle."

In its conference call, Safe Bulkers noted that the No. 1 driver of low rates has been oversupply. It then noted an extreme slowdown in the orders for new ships for 2013 all the way through 2016 -- yet it expects scrapping rates of old ships to stay steady.

CEO Polys Hajioannou is quite optimistic about the long term, but is more cautious about the short term, just like Genco and Baltic. He stated, "We expect that the market will be slow at the start of the year ... we are optimistic, I would say, after the first quarter of next year."

Foolish final thoughts
If the optimistic long-term forecasts prove to be correct, the second quarter of 2014 and beyond will show improving rates for dry shipping companies. While Fools tend to be long-term investors, entry timing and price will affect long-term performance. History has shown that the stock prices of dry shipping companies often move up and down at the same pace as the rate environment.

Pay close attention to commentary from companies as time goes by and they get increased visibility on the outlook for 2014. Prepare for a possible dip in shipping rates early next year. If so, it may be a great time to consider a speculative investment in dry shipping stocks. The temporary dip may mark rock bottom shipping rates and stock prices, ahead of a long-term improving rate environment. 

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12/31/1969 7:00 PM
BALT.DL $0.00 Down +0.00 +0.00%
Baltic Trading CAPS Rating: **
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SB $1.54 Up +0.02 +1.32%
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