Which Dry Shipper Is The Grasshopper, and Which Is The Ant?

In the last couple of weeks, Diana Shipping (NYSE: DSX  ) has announced fixed-rate contracts for two of its vessels. While having fixed-rate contracts locked in assures Diana Shipping operating profits, the company couldn't have picked a worse time to lock in the rates

Diana Shipping, the ant
Recall the fable of the grasshopper and the ant. For years, Diana Shipping has been operating more like the ant – diligently accumulating cash while cautiously keeping debt down. With the dry shipping environment showing signs of recovery, maybe it's time for Diana Shipping to pay attention to Baltic Trading Limited (NYSE: BALT  ) and start operating more like the grasshopper.

Of its two new fixed-rate contracts, one is for at least 22 months with one of its Capesize ships, and the other is for at least 9 months with one of its Panamax ships. The Capesize contract is for $18,350 per day, and the Panamax contract is for $11,000 per day.

At the time of this writing, the daily spot rates for Capesize ships are at $27,041. The daily spot rates for Panamax ships are at $13,903. These rates are already higher than Diana Shipping's new contracted rates by 47% and 26% respectively.

Diana Shipping almost nailed the exact V-shaped bottom. Since every dollar of higher rates goes straight to the bottom line as profit, Diana Shipping has already sacrificed a lot of profit, presumably for the security it received locking in rates.

What security?
Even a contract doesn't guarantee ironclad security. On Nov. 27, one of its charterers terminated a contract in light of cheaper rates. Determining whether Diana Shipping will ultimately be able to recover for breach of contract involves risks and unknowns even less certain than the rate environment itself.

It's odd that Diana Shipping jumped into two new contracts at rock bottom prices, considering how optimistic the company is about increased rates in 2014. The company believes dry shipping is in the "lower parts of the cycle."

Baltic Trading Limited, the grasshopper
Meanwhile, right after Diana Shipping, Baltic Trading Limited announced it has taken delivery of a Capesize vessel and entered a contract. But instead of entering a fixed-rate contract like Diana Shipping did, Baltic Trading Limited, tied the roughly year-long charter directly to the daily floating spot rates.

Thus, right out of the gate -- or dock, in this case -- Baltic Trading Limited will be charging 47% more for its Capesize vessel than Diana Shipping will be charging for its similar-sized vessel. What's more, Baltic Trading Limited is in position to capture any further appreciation in rates, which both it and Diana Shipping see coming in 2014.

Baltic Trading Limited expects "further improvement in the prevailing rate environment." The company is calling for increased iron ore demand from China and limited supply growth in ships to fuel the rate surge. It is so confident in better rates that it's also paying a quarterly dividend of $0.02 per share, while Diana Shipping is opting to forgo any dividend until later in the shipping cycle. Then again, with Diana Shipping locking in rates at potentially rock-bottom prices, it's hard to blame the company for conserving its cash reserves.

Foolish final thoughts
Based on this behavior, Baltic Trading Limited is the higher-risk company, but it also offers the higher potential reward. Follow the rate environment. As long as rates continue to escalate, as expected by both Baltic Trading Limited and Diana Shipping, then investing with the grasshopper should prove to be the better strategy.

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Comments from our Foolish Readers

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  • Report this Comment On December 03, 2013, at 5:53 PM, imacg5 wrote:

    Since you have shown in past articles to have no experience with shipping stocks. And don't understand them. Then it is expected that you would take one weeks Cape rate and think that is an indicator of what is to be expected, or for it to just keep climbing.

    Then I will have to just say, Wait until the first Quarter of 2014 before you make this judgement about which company made the better move.

    Cape spot rates are projected to be $13,000 per day by January 2014, at which point DSX will be making money, and BALT won't.

    $18,000 per day was not "Rock bottom prices". It was the going rate for Period charters at that time, not to be confused with the Spot rates.

    If you haven't learned to make these judgements with a BDI that is this volatile, then you shouldn't be writing about things you know nothing about.

    The Cape rates are at $27,000 per day this week. So what, wait a month, and take the average over the next year.

  • Report this Comment On December 04, 2013, at 12:44 AM, nickeyfriedman wrote:

    Part of my point that may have been missed is that Diana Shipping could have at least waited a couple of weeks and locked in better prices. Either way, Diana Shipping itself felt prices would be higher yet Diana Shipping locked in prices during a very temporary (so far) dip.

    With Capes at $27,000, obviously locking it in at $18,000 wasn't a smart move. Locking it in at $27,000 would have been much better.

    First quarter 2014 won't tell us much since many dry shippers expect a temporary seasonal dip in Q1 2014.

    I have no idea if the rates will keep climbing from $27,000, but $27,000 is certainly a lot better than the $18,000 the company locked in.

    The projections by the way have been way off the mark and too pessimistic by BIMCO so I wouldn't be very confident in that $13,000 projection in Q1 2014 nor would I be very confident it in lasting very long if it does hit that.

  • Report this Comment On December 04, 2013, at 1:50 PM, nickeyfriedman wrote:

    See this, Diana already got a much higher rate than $18,000

    http://finance.yahoo.com/news/diana-shipping-inc-announces-t...

  • Report this Comment On December 04, 2013, at 5:09 PM, imacg5 wrote:

    ""With Capes at $27,000, obviously locking it in at $18,000 wasn't a smart move. Locking it in at $27,000 would have been much better.""

    You just don't understand how this works.

    Spot rates reached $27,000 per day. For one voyage, for a limited time.

    But, at the same time, 2 year Period charters, have just recently climbed to a range of $18,000.

    They didn't miss out on any two year charters for $27,000 because there haven't been any. Only SPOT rates reached $27,000 per day.

    The recent charter for the Houston, at $20,000 per day, was for ONE year. That makes a difference too.

    Again, you will have to compare the average TCE from the BALT Capes, to the average TCE from DSX in two years before you can call the DSX charter policy a mistake.

    When Cape rates fall to $13,000 in the first quarter, then the TCE average for BALT will take a hit.

    How about when Spot cape rates reached $4,000 per day last year? That would really hurt.

    Yes, most CEO's have been optimistic, about next year, They have been wrong about that for several years, just as BIMCO was wrong about how high the rates would get this Fall.

    And charters like the one that the Houston got for $20,000 are for a period of one year.

    If you are comparing the three, you need to take into consideration the risks involved with being on spot rates. Diana chose not to go on spot rates, and you will have to see what happens over the next two years to call it a mistake. I'll take CEO Palos decision making over yours or BALT. Based on the past six years of handling this crisis.

    The FFA's are traded by all these ship owners and brokers. They are Forward Freight Agreements, basically Futures for charter rates. And it's the FFA's, not BIMCO, that is giving projections for the first quarter of 2014. And I'll take their projection ahead of yours any day.

    Are you aware of the effect of Chinese New Year on charter rates? And do you know how many new ships have been ordered this year? When people get excited about the fact that the order book has shrunk, they don't take into consideration that the glut will continue to grow over the next two years.

    Rates will be barely profitable.

  • Report this Comment On December 05, 2013, at 11:01 AM, nickeyfriedman wrote:

    Cape spot rate today: $33,475

    Diana sold out too cheap. It could have gotten better than $18,000 and the proof is the contract with it next ship was over $20,000.

    I'm aware of the effect of the Chinese New Year, but it's not cast in stone. If you study the BDI you'll see that it doesn't always dip (though it often does) in January. Even when it does, it often rebounds to December levels and higher within weeks.

    BIMCO predicted lower, not higher, rates for the fall. In August 2013 BIMCO predicted average rates of Capesize vessels to be $8,000 to $13,000 per day. Today: $33,475

  • Report this Comment On December 05, 2013, at 6:57 PM, imacg5 wrote:

    ""Diana sold out too cheap. It could have gotten better than $18,000 and the proof is the contract with it next ship was over $20,000.""

    A charter for ONE year at $20,000 does not prove that a charter for TWO years at $18,000, was too cheap.

    Charters of different lengths have different rates, And to suggest that Diana should wait a couple weeks to get a better rate on a hunch that rates might rise is ludicrous. It costs $8,000 per day for a Cape to sit at anchor and "wait".

    If you think that Diana should put it's ships on spot, and play that market, then that is a different story.

    But the fact that the spot rates rose to $33,475 today, doesn't mean that the going rate for a TWO year charter has gone up one dime.

    You are comparing apples to oranges.

  • Report this Comment On December 05, 2013, at 7:27 PM, IdaAg wrote:

    Thank you imacq5 for your corrections and information.

    I'm an owner of DSX for some time, waiting for a rebound. I love DSX because they have low debt and manage there business as if they were the founders. Many other companies have gone so far into debt that when prices rise they will still not have any cash but will be paying off debt, and if prices were to drop or stay down they will be out of business. I prefer to know a company I own will be in business in two years.

  • Report this Comment On December 06, 2013, at 12:19 AM, nickeyfriedman wrote:

    Do you think the one and two year market charter rates are just a tad better when Capes are at $18,000 on the spot or when they are at $33,000 on the spot?

    I think Diana could have gotten better rates if it stuck to the spot market temporarily. Most importantly, it doesn't matter what my opinion on where rates are headed in 2014. Diana itself believes they are going higher yet Diana locked in rates now rather than during a time period it expects higher rates. It seems overly cautious or lacks conviction in its own forecasts.

    Yes, Diana has done well in hindsight during bad times. If Diana really thinks better times are FINALLY ahead, it is not acting like it. Therefore it was a mistake based on its own beliefs.

  • Report this Comment On December 06, 2013, at 7:21 AM, imacg5 wrote:

    """Do you think the one and two year market charter rates are just a tad better when Capes are at $18,000 on the spot or when they are at $33,000 on the spot?""

    This fall, when Spot rates reached $40,000 per day, the one year charters where going for between $20,000 and $22,000 per day. The owners and the charterers know that rates fluctuate during the year. Those one year rates were up considerable from the previous Spring just as the spot rates were up. But, the one or two year charters are stable, and represent what the ship owner and charterer consider to be a reasonable average over that time frame.

    Diana, and the rest of the dry bulk CEO's expect an improved rate environment. That doesn't mean that rates are going to improve above the $33 million that spot rates are at, it means they expect that the average rate for 2014 to improve.

    You refuse to understand that when Diana chooses a period charter over a spot charter that Diana is expecting the Cape rates to be lousy in the first half of 2014.

    After the BDI falls at the end of the year, it does have a rally because of the Soy bean harvest in South America. That has a profound effect on the Supramax rates, and some Panamax. Not Capes.

    In late 2012 Cape spot rates rose to $18,000 per day on the ore chores. They then fell below $10,000 by February, they stayed below $10,000 until June 28. trading mostly between $4,000 and $7,000.

    In 2011 the Capes had their usual rally in the fall, followed by the usual year end crash, and reached a 20 year low of $3,600 later that Spring.

    Diana might be leaving some money on the table, but they choose the stability of period charters.The majority of their lenders prefer the stability of the locked in revenue when they go to the banks for more ships. And I would say, the major shareholders would also prefer the stability that Diana provides with their plan. Their stock price hasn't been the volatile disaster that the debt ridden, diluting, spot players have. Diana may have less upside potential for traders, but a much more conservative choice.

    If you choose to go with a spot player like BALT, that is your choice, but to say that Diana missed the boat, or should have waited is wrong. But you will have to see for yourself.

    I would say by May 2014, that charter for $18,000 per day is going to look quite good.

    The optimism that is expressed by the CEO's should be taken with a grain of salt. The sector is still oversupplied. The new ships being built should absorb the modest growth that is expected. And the scrapping will come to a screeching halt when rates remain above break even.

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