The Pivotal Point for DryShips Inc., Diana Shipping, and Others

The drybulk recovery needs a jump start. Follow this to see if it's coming.

Apr 28, 2014 at 9:52AM

It's now almost May. Where is that 2014 drybulk recovery that DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX), and so many other executives were calling for? On a year-over-year basis, the Panamax ship rates are firmly in the red, and the Capesize rates aren't doing much better. Here's a key thing that may need to change and what to look for.

Source:  Diana Shipping

Good for now
To start, let me just point out that the no. 1 thing that is negatively affecting shipping rates is the import demand for iron ore to China. Both DryShips and Diana Shipping aren't affected much by the short-term swings in the daily spot rates since their ships are almost entirely locked in fixed-rate long-term contracts. The way their stocks trade are affected by the emotion of the market, however.

In an interview a little over a month ago, DryShips CEO George Economou stated, "No one has a crystal ball, but we have every reason to believe that the fundamentals for the dry bulk market are quite clear and point to a stronger market ahead."

Economou went on to say that DryShips expects a "hot" market over the next three months before it temporarily slows down for the summer. So far, it has done nothing but crash instead. For the sake of the dry shipping industry, let's hope that DryShips is as wrong about the summer as it has been about the spring.

Psychology is temporary
Shipping broker George Iliopoulos points out that despite the weakness in shipping rates over the last several weeks, the asset values of ships being sold in the secondhand market continue to be strong. The secondhand market is considered more sophisticated and much less prone to emotional swings.

Illipoulos notes that "psychology, as always, is still playing a very important role for both buyers and sellers" and doesn't have much longer-term meaning. Sometimes, weakness in prices will cause freight buyers to temporarily hold off in reaction to the price volatility itself, further causing a somewhat downward artificial hit. Illipoulos added, "There are a lot of people who firmly believe that the market will make a come-back in 2014 and freight rates will bounce back up."

It's all about the iron
According to the Baltic and International Maritime Council, or BIMCO, "The fleet development in the dry bulk segments has been fully along the forecast lines, both for inflow of new ships as well as demolition." This means the shipping supply side is unfolding as forecasted. Now watch demand.

BIMCO notes that "2014 will be a year with full focus on the big mining companies, who are ramping up the production of iron ore." More production means more shipping demand and higher rates. BIMCO describes the iron ore situation as a "flooding of the market," which has already begun since iron ore prices were between $130 and $140 per ton and are now at $120. It crashed all the way down to $105 in March with a rebound since.

As DryShips has pointed out in the past, China imported only 1 ton of iron ore for every 2 tons it mines and uses domestically last year. This means that it's not just demand for iron ore by itself that affects shipping rates but the "market share" of imports compared to domestics.

The key is that at certain price levels, many domestic mines simply can't compete with the imported shipments. China will have little choice but to increase shipping orders. Not surprisingly, when prices hit $105 per ton in March, iron ore import shipments exploded to a 13-month high.

The pivotal point


Source: DryShips

Global market price of $120 per ton for iron ore happens to be a key pivotal. According to Frik Els, editor and writer of, the $120 mark has "long been considered a price floor for iron ore as many of China's hundreds of small scale miners quickly become unprofitable at these levels."

Below that will cause a material uptick in import demand since much of the imported supply comes from Australian, Brazilian, and South African miners where costs for them are only between $45 and $55 a ton. With delivery, it's around just $60 to $65 a ton. It's hard for Chinese mines to compete.

If iron ore prices happen to fall below $100, then the market could "explode" as DryShips expects. Pan Guocheng, chief executive of privately owned miner China Hanking, believes that with iron ore prices below $100 per ton, between 40% of 50% of Chinese miners could end up being forced to close their mines and cut off 150 million tons of annual supply. All other things being equal, DryShips would easily be right and rates would indeed explode.

Foolish final thoughts
Long term DryShips and Diana Shipping are affected by changing Capesize rates even though short term neither sees much fundamental effect. With new iron ore supply from mines flooding the market, however, we could see a long-term depression in iron ore prices. That could spell higher rates for new contracts for DryShips and Diana Shipping. For now, watch that $120 per ton mark as it seems to be the pivotal decider of where the market is going.

This is important for dry shipping too
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information