Expanding Opportunities in Shipping

In a previous article, I wrote about the potential of a free trade agreement between the U.S. and the E.U. increasing demand for shipping. But there is another development, in this hemisphere, that has the potential to lower costs for shipping companies: Panama is working to expand the Panama Canal.

Some of the shipping companies to watch include Star Bulk Carriers (NASDAQ: SBLK  ) , Diana Shipping (NYSE: DSX  ) , and Navios Maritime Partners  (NYSE: NMM  ) .

Diana Shipping owns 36 ships, and is awaiting delivery of five more. Its net income decreased from $128 million in 2010 to $107 million in 2011, and $54 million in 2012. On Sept. 30, 2013 it had cash of $315 million and $460 million in total debt, giving it the strongest cash position of the three companies. Watch for its 2013 annual report, which it will release on Feb. 18, 2014. It owns three Kamsarmax and three Post-Panamax ships.

Star-Zeta. Source: Star Bulk Carriers

Star Bulk Carriers owns 15 ships. While Diana Shipping's net income has been shrinking the last few years, Star Bulk has had widening net losses of $5 million in 2010, $69 million in 2011, and $314 million in 2012. As of Sept. 30, 2013, it had $75 million in cash and total liabilities of $206 million. It owns eight Supramax and two Ultramax ships.

Navios Maritime Partners owns 19 ships. Unlike the aforementioned companies, its net income increased from $60 million in 2010 to $65 million in 2011 and $95 million in 2012, but decreased to $59 million in 2013. On Sept. 30, 2013, it had cash of $145 million and total liabilities of $369 million. Most of its ships are Capesize and Panamax ships, which will not be affected by the expansion.

Expanding canal
At present, only ships 965 feet long, 106 feet wide, and with a draft, or depth, of up to 40 feet can enter the Panama Canal. Panama is working to expand the canal so that ships up to 1200 feet long (366 meters), 160 feet (48.8 meters) wide, and with a draft up to 50 feet (15.3 meters) could utilize the canal. Newcastlemax carriers and Capesize vessels will not be able to sail through the expanded canal as their draft is too deep, but Post-Panamax vessels, Ultramax, Supramax, and Kamsarmax vessels, which cannot currently navigate the canal, will be able to. The canal currently handles 5% of global maritime shipping, and two-thirds of everything that goes through the canal is going to or coming from the U.S. The U.S. has already spent millions upgrading ports in the Gulf of Mexico and on the East Coast to be able to accommodate the larger ships.

Expanding costs
Unfortunately, the costs of the project are expanding along with the canal. The group charged with the project is threatening to halt construction unless it is paid $1.6 billion in cost overruns. The government of Panama is refusing to pay for the cost overruns and has threatened to hire another group to finish the project if construction is halted. While the president of Panama insists that the project will still be completed in 2015 , other experts warn that finding another group to finish the project could delay completion until 2018, 2019, or even 2020.

Competing canals
While Panama is wrestling with expanding its canal, Nicaragua recently agreed to allow HKND, a company based in Hong Kong, to build a canal across its territory. The project is estimated to cost $40 billion. It was scheduled to begin construction in May 2014 but that has been delayed until 2015. HKND estimates it will take less than six years to complete the project.

While an expanded Panama Canal would cut costs for shipping companies, it does not guarantee smooth sailing for them. The shipping industry is dependent on the global economy, and any economic slowdown would be a setback to shipping. With China's growth rate expected to slow, shipping could be a risky investment. Also, a shorter route through the canal could mean less demand for ships, as goods could be transported in less time with fewer ships. That being said, if the global economy continues to recover and the Panama Canal expansion is completed on time, shipping companies could be looking at increasing revenues and lower costs.

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