Why Navios Maritime Holdings and DryShips Don't Care About Stockpiles


Source:  Navios Maritime Partners

Easy money and easy credit have been blamed for overbuilding in China. Flotillas of ships head to China to deliver iron ore and pile it up sky high. Bearish opinions about dry shipping frequently refer to this as fake demand, pointing as evidence to the massive stockpiles of iron ore sitting all over China's ports at unsustainable levels. But Navios Maritime Holdings (NYSE: NM  ) and DryShips (NASDAQ: DRYS  ) say that bearish opinion is nonsense, and both companies have some interesting data to back them up that is hard to refute.

Pile sky high yet nobody cares
These days the number one factor that will make or break the entire dry shipping industry is iron ore shipments to China. You'd have a hard time finding any executive, analyst, or expert in the industry that disputes that notion. With that in mind, and according to Commodore Research, the stockpiles of iron ore not yet used and already shipped to China stand at or near record levels, over 100 million tons at the end of April, up 48% year over year.

Doesn't this worry Navios Maritime Holdings, DryShips, and other shippers? In a word: no. Bears have this concern all wrong, and the reason is simpler than you think.

China uses an awful lot of iron ore
For starters, as DryShips has pointed out in interviews and conference calls, China uses a ton of iron ore. Scratch that -- billions of tons of iron ore. In 2013, for example, it used well over 2 billion tons. While 100 million tons sounds like a lot, it really isn't when put in the proper context of just how much iron ore consumption there is in China.

In fact, the current stockpile levels are barely enough.

Ted Petrone, president of Navios Maritime Holdings, recognized in the company's latest conference call that a lot of people are worried about the iron ore stockpiles, but he's confused why that is the case. He pointed out that the current stockpile levels are only equal to, on average, just 27 days' worth of inventory. Think about how slim that is -- in fact, it's Navios Maritime Holdings' opinion that 27 days of inventory happens to be right around the average over the last five years.

Worry no more
In other words, according to Navios Maritime Holdings, there is nothing unusual let alone alarming about the stockpiles. Maybe we all still have an inventory-phobic, post-housing-bubble mentality where the mere thought of the word "stockpiles" when it comes to any asset class sounds scary. But 27 days for just about any asset isn't a heck of a lot.

Next up, if you believe what DryShips and Navios Maritime Holdings believe, then China's stockpiles are due to actually rise a bit from increased demand. In other words, using the same five-year average stockpile to consumption ratio that Navios Maritime Holdings cites is 27 days, China is going to need greater stockpiles -- not less.

And greater stockpiles will mean more shipping. And more demand. And higher rates.

Focus away from stockpiles
The key now is if demand for iron ore -- and hence, steel -- can continue in China at the same rate it has been growing. Of course, it's not quite that simple. China uses two competing sources for iron ore -- domestically produced and imported. Based on 2013 data, when domestically produced iron ore can compete with imports on price, China uses it by a factor of two to one.

If Chinese domestic production of iron ore were to fall off because it is uneconomical, as DryShips and Navios Maritime Holdings have been mentioning in their conference calls, then imports will need to replace the lost domestic supply whether overall iron ore demand rises, falls, or stays flat.

The Foolish takeaway is simple: ignore the stockpiling data. Unless you hear that it has gone from 100 million tons to something exponentially different, or that demand itself has fallen off a cliff, that often trumpeted statistic is nearly worthless to dry shipping investors at this time. 

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