Predatory Pricing May Spark the Next Rally for DryShips, Star Bulk Carriers, and Others

Fierce commodity competition is DryShips, Star Bulk Carriers, and others’ best friend.

Jul 7, 2014 at 5:43PM

Star Gamma Port Deck
Source:  Star Bulk Carriers

Just when you thought it was safe to go back in the water transportation sector for dry shipping, predatory pricing smells opportunity. This could benefit dry shippers such as DryShips (NASDAQ:DRYS) and Star Bulk Carriers (NASDAQ:SBLK). The source of this maneuver is not the way that DryShips charges for its voyages or the way that Stalk Bulk Carriers buys new ships. Instead, it's coming from a rather unlikely source, and it has a dry shipping rally written all over it.

What is predatory pricing, anyway?
Predatory pricing is an economic term for when a big fish company, the predator, competes with the little fish companies by increasing output and lowering prices far below the competition in an effort to put the little guy out of business.

Wal-Mart has been accused by some similar predatory practices that drive local businesses out of business so it can take increased market share. In some cases, the larger fish will even temporarily bring prices down below cost in order to execute this strategy successfully.

How predatory pricing affects dry shipping
Neither DryShips nor Star Bulk Carriers participate in this strategy. If for no other reason, they avoid it because neither one is large enough nor powerful enough to be successful at doing so. What does seem to be happening, however, is that within the iron ore market, large iron ore producers are engaging in the practice in order to put Chinese mines out of business.

Simos Spyrou, CFO of Star Bulk Carriers, stated in the most recent conference call, "First of all let's talk about iron ore, perhaps the most important commodity in the drybulk shipping space." If you've been paying attention to the dry shipping market and listening to what players such as DryShips have been saying, you know by now that the shipping of this single commodity to China will make or break the entire dry shipping market over the coming quarters.

George Economou, CEO of DryShips, has pointed out in interviews and conference calls that despite the enormous amount of iron ore imports coming into China, it's not nearly as large as China's domestic iron ore production within its borders which is nearly twice the amount. It stands to reason (according to DryShips) that if production were to fall within China, import volumes would have to jump in order to replace the slack. This spike in import volume demand will then spike rates and cause a dry shipping rate rally and the red hot market DryShips has been expecting.

Shark bait
According to Spyrou in the Star Bulk Carriers conference call, the large miners especially in Brazil and Australia see $100 per ton and less in global iron prices as their prey. If they can ramp up production high enough, even if incurring extra costs to speed it up, the result will be that "the majority of small private Chinese producers are non-competitive."

China will then turn to imports, more of the market will be secured for the foreign miners, and the ripple effect will be more shipping and higher rates for DryShips and Star Bulk Carriers. Spyrou sees "exponential growth" in iron ore purchasing coming online right around the same time as the rain season in South America brings about the large harvests of grains to be exported, and Dryships and Star Bulk Carriers may have a perfect storm "multiplying effect" on their hands in the months ahead.

Foolish takeaway
Both DryShips and Star Bulk Carriers are migrating toward an operating strategy that is based on the daily spot rates to maximize the benefit of an upsurge in shipping rates. While you should take optimistic statements from company executives with a grain of salt, both of these companies are putting themselves in position that is consistent with their statements. And their claims make sense.

As I do more reading and analyzing, it seems like a rate rally at some point in the second half of the year is about as likely as you can get. If and when it does come, you can thank predatory pricing for doing its best to push it over the edge.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers