Have These Dry Shipping Companies Hit Rock Bottom?

Experts say to look for these signs in the weeks to come.

Feb 14, 2014 at 5:33PM

Source:  DryShips,

Various dry shipping stocks such as DryShips (NASDAQ:DRYS), Navios Maritime Partners (NYSE:NMM), Safe Bulkers (NYSE:SB), Baltic Trading Limited (NYSE:BALT), and Star Bulk Carriers (NASDAQ:SBLK) are well off their highs. This begs the question... is it time to buy? For 2014, many analysts and experts expect something particularly exciting for the industry that will bring much relief to ship owners.

The last mini-cycle rally
The industry has been plagued by overcapacity for nearly six years. With the daily spot rates at breakeven or worse levels, it would seem that rates can't get any lower. Perhaps we're at a bottom, and the next rally will soon begin.

Back in September, I wrote my first article on dry shipping for the Fool, wondering if the dry shipping industry was in a new bull market. At that time in mid-September, dry shipping rates were having the biggest rally they'd seen in years. China was shipping iron ore in large quantity even ahead of its normal October to December seasonally strongest period. Soy and grain exports were expected to be robust, as well.

The rally continued strong, and 2013 ended with rates near levels not seen in years. As you probably know, 2014 saw another collapse in rates and dry shipping stocks due to the seasonal nature of the slower economic activity of the Chinese New Year, as well as bad weather halting some shipments. Now that it's ending, and the clouds are clearing, some believe the next big rally will be upon us soon.

What is particularly exciting about 2014
For 2014, many expect worldwide demand this year for the first time in seven years to outgrow supply. Increased shipments of coal, iron ore, and grains are all expected to rise at a faster clip than new ships will come on board after accounting for the scrapping of old ships.

This change should improve the rates for the industry, according to many analysts, experts, and executives. For example, Ong Choo Kiat, President of U-Ming Marine Transport stated, "While there will be potholes, here and there, as always, the worst is over based on the market fundamentals."

Barclays Research expects a 5.8% rise in demand by tonnage coupled with only a 5.3% rise in supply by tonnage. If proven to be true, it will mark the first year that the shipping industry "finally shakes off" the supply build boom that occurred at the same time as the housing bubble.

It's all about China
These same experts and analysts will be laser-focused watching China -- and you should be, too. For 2013, 83% of the worldwide demand growth was attributed to China alone. This single country accounted for 35% of the world's volume of dry bulk shipments and 40% of the dry bulk industry's transportation in terms of miles. In other words, at any given moment, 40% of the dry shipping capacity on the seas was headed either to or from China.

Needless to say, any unexpected shift in volume shipments with China would affect worldwide dry shipping rates in a substantial way and could make or break the fortunes of many dry shippers.

Foolish final thoughts
Note that many dry shippers operate under long-term contracts at fixed rates rather than based on the daily spot rate. However, DryShips and Baltic Trading Limited both have significant exposure to the spot rates, and the trading of the stock prices of the group, as a whole, are affected by the daily spot swings even though its more true of DryShips and Baltic Trading Limited. While that may not sound like it has any long-term implications, these companies raise money often through equity offerings. The dilution from these equity offerings will depend on where the stock prices are; thus, there are actually long-term effects from short-term trading of these names. With this in mind, investors of any dry shipping company should follow the daily spot rates closely.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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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