When a large, credible company such as Diana Shipping (NYSE: DSX ) speaks, you should listen. You would have been hard pressed to find anything negative said by anybody in the dry shipping industry just three months ago. With its latest earning report, that all changed for Diana Shipping. Will DryShips (NASDAQ: DRYS ) and others echo ?
Rewind three months
Back in November, Diana Shipping president Anastasios Margaronis stated, "Everyone involved in dry bulk shipping should start to accept as an inevitable development of the continued growth of China and its effect on freight rates going forward." "Inevitable" is a strong word.
Margaronis added, "According to Commodore Research, production in India and demand commodities, particularly iron ore and coal, will continue to grow going forward." Again, this is quite bullish.
Diana Shipping executives went on to forecast in detail rising demand, stabilizing steel prices, greater increase in iron ore stockpiles, increased shipments of coal, and the like. The company was so confident in the state of the dry shipping industry, that it started talking about paying a dividend again as the industry moves into the upper part of the cycle.
Now the warning signs
The dividend talk was proudly mentioned as being part of prepared statements for this call that occurred three months ago. For the most recent call, talk about dividends was dropped entirely. In fact, when an analyst asked about it during the Q&A session, it was quickly shot down. CEO Simeon Palios ended his response with, "We do not consider introducing a common stock [dividend] if we don't end up at this part of the cycle." It was in stark contrast to the feel-good, a-dividend-is-coming talk of last quarter.
The more recent Diana Shipping call contained many warning signs and concerns that were cautious at best, but which could be real worries and concerns at worst. On the call, Margaronis noted the seasonal decline in rates that's occurred since the beginning of the year, but he pointed out that analysts are seeing more than just seasonality.
A cited concern is the $3 trillion debt market that's part of the unofficial banking sector in China. The company fears a "breakdown in the orderly operation" of this resulting in "unthinkable" consequences. China has built up an economic imbalance that could come crashing down, Diana Shipping fears.
Margaronis went a bit against the grain of other executives when he said, "As for shipping the effect from growth in the transportation of bulk commodities could be quite serious and most growth models predicting a favorable supply demand balance will look unrealistic for a number of years." This sounds like he's referring to DryShips and others' optimism as "unrealistic."
Worst case scenario, according to Diana Shipping: "The world's economic growth and the financial system as a whole would be devastated." What a difference three months makes. Ouch.
DryShips thinks otherwise
It was quite the opposite of the DryShips conference call that was filled with optimistic forecasts. CEO George Economou is "very excited" and sees the supply and demand imbalance finally turning in the industry's favor. He expects rising rates and profits for DryShips and others in the industry. DryShips believes the extreme volatility in the rates and rising ship asset prices both point as evidence to a tightening supply market and smooth sailing ahead.
Economou didn't leave any wiggle room. He called the volatility "a clear sign of a balanced supply demand picture," and the asset prices "a strong indication of current market sentiment." He said point blank in referencing DryShips and the industry, "We are optimistic and expect a sustainable recovery in 2014 and beyond."
Foolish final thoughts
DryShips and Diana Shipping each have very different strategies on how to operate going forward. DryShips is more confident and is preparing to operate based on daily spot rates instead of fixed long-term contracts. Diana Shipping is obviously more concerned and cautious and prefers to lock into fixed-rate contracts and avoid the risk of potentially declining rates. With so much controversy, different indicators, and conflicting data emerging lately, Fools may want to wait at least a bit to see where it all ends up.
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