Diana Shipping's Greatest Fear May Now Be Inevitable

Diana Shipping cautions investors about the medium term atmosphere in the dry bulk industry.

Jun 11, 2014 at 3:11PM

Oceanis
Source:  Diana Shipping

George Economou, Chairman and CEO of DryShips (NASDAQ:DRYS), stated on May 22, "We continue to expect a sustainable recovery in charter rates during the second half of 2014 and beyond." His short-term optimism seems to be shared by the vast majority of dry shipping executives. However, just how sustainable the recovery is, and how far beyond 2014 it could be maintained, is of great concern to Diana Shipping (NYSE:DSX). l

Short-term full-steam ahead
Through the end of 2014, Diana Shipping and DryShips agree that the industry should be looking at higher rates ahead. More global supply from South America hitting the high seas should take away the world's overhang of excess shipping capacity in the months ahead. If so, both DryShips and Diana Shipping stand to benefit as they both have a number of ships in their fleets coming off fixed-rate, long-term contracts.

Anastasios Margaronis, president of Diana Shipping, pointed out during its May 14 conference call that in the seven weeks prior to the call, Chinese stockpiles of steel plunged 16% when compared to last year. Conversely, Chinese steel production during the same time had risen to record levels. This suggests that China is going to need to import a lot more iron ore in the months ahead. Stockpiles of iron ore had also fallen in four out of the five weeks prior to the call on a week-over-week basis, although they are still quite high compared to a year ago.

Ziad Nakhleh, CFO of DryShips, stated during its May 23 conference call, "We have since experienced a stagnation in the market mostly due to seasonal factors such as weather disruptions, weaker Chinese steel demand due to construction slowing down due to winter months."

Margaronis pointed out that this stagnation has reversed. The Chinese government recently announced a huge multibillion-dollar investment in low-cost housing construction, as well as in 6,600 kilometers of new rail line. Overall, Diana Shipping anticipates a 9% increase in seaborne iron ore trade, yet only a 4% increase in the supply of Capesize ships, the main ships that transport iron ore, which are also the ships that tend to make or break the entire dry shipping market.

2015-2016 problems
Both DryShips and Diana Shipping hope and expect rates to rise over the next year, but Diana Shipping will be the one to quickly lock them into fixed-rated contracts while DryShips plans otherwise. DryShips believes that the coming recovery is here to stay for the simple reason of accelerating demand, decelerating supply, and accelerating scrapping of old ships further reducing supply.

Diana Shipping takes a different stance than DryShips. Simeon Palios, CEO of Diana Shipping, stated during the conference call, "We feel that we're going to have too many ships in the market over the next 18 to 24 months." It's this window in particular that he feels will be a period of high deliveries.

Diana Shipping had warned in its call back in February that rates would only rise if "orders do not flood the markets with vessels." Palios believes this will be exactly what will happen in 18-24 months, and unless there is an "extraordinary [amount] of scrapping" we're simply "going to have a soft market" due to this supply.

DryShips is more optimistic about scrapping taking out significant supply. During the DryShips conference call, it was mentioned that over 8% of Capesize and Panamax ships are older than 20 years, and another 10%-12% are between 15 and 19 years old. The useful life of a seagoing vessel in the dry shipping space tends to be around 20 years. Based on that, DryShips believes a large chunk of the global supply will inevitably be heading for the junkyard.

Foolish final thoughts
Margaronis summed it up nicely when he said during the conference call that It is "difficult to be overly optimistic about the medium-term health of the bulk carrier market" based on the historical rate of deliveries plus what is coming two years out.  Will DryShips or Diana Shipping be the one who is proven right? No doubt they'll both update us in their press releases and conference calls and will have better insight as we get closer to the fall of 2015, the beginning of the time for concern, according to Diana Shipping. In the mean time, it could be a lovely ride up for rates in the shorter term.

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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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