At the time of this writing, Panamax ships command, on average, a daily spot rate of $3,362 per day. These ships transport on the high seas grains, coal, and all sorts of other dry commodities. The rates seem ridiculously low, down nearly by half on a year-over-year basis and exhibiting no signs of life currently.
Yet on June 13, Diana Shipping (NYSE:DSX) announced a new contract for $9,000 per day for one of its Panamax ships. Both parties involved seem to think an enormous jump in shipping demand is coming right up.
The contract isn't even long term
Normally you might be tempted to dismiss such announcement as speculative guessing when it comes to long-term fix rated contracts, but this one is only for seven to 10 months, or possibly just to the end of this year. While contracts offer security and certainty from both parties, the rate and the price each accepts can be very telling.
Obviously, the amount is related in strong part to current market rates for such contracts, but both parties accepted to partake in that market. The broader market, assuming the $9,000 is a fair price for both parties, is telling you right or wrong that Panamax shipping rates are likely to have a large rally.
Consider some math
The deal was inked with a company called Glencore Grain B.V., Rotterdam. Presumably Glencore thinks current rates are far too cheap and believes it is likely that rates will be going much higher than $9,000 -- and it is therefore getting a bargain. It knows full well it is paying a huge percentage premium at $9,000 in the short run since daily rates are less than $4,000. In order for the $9,000 per day to prove to be a savings, rates will have to go up something materially higher than $9,000 at some point during the duration of the contract.
Diana Shipping, you might argue, must not be very confident about even higher rates than $9,000. However, a contract strategy is the strategy Diana Shipping has been using for quite a while now, and it plans to continue to do so. Diana Shipping has a bit of a reputation for trading short-term profits for longer-term certainty and security no matter what its confidence of the near term.
The second half of the story
Perhaps more interesting, however, is that Diana Shipping engaged only a seven- to 10-month contract. If you look at its history, Diana Shipping tends to opt for 18 to 24 months. It seems like Diana Shipping went shorter term than it usually does, which may actually imply confidence in much higher rates, perhaps above the $9,000 mark, as it is taking more risk than it usually does.
Based on what analysts Frode Morkedal and Herman Hildan of Platou Markets are saying, Diana Shipping is not alone in this strategy. They wrote, "Many owners are booking their vessels on short period contract with the hope of rates increasing in the second half of the year." They believe the Panamax market could see an upswing as Brazil increases its iron ore exports and companies ditch more expensive larger ships for two Panamax ships.
Foolish final thoughts
You know the saying: Actions speak louder than words. I'll add that money speaks even louder. The disconnect between the seven-month contracted rate and the daily spot rates suggests the majority of the players in this market expect Panamax rates to jump ahead. For Diana Shipping investors, this is good news as all of its Panamax fleet comes off contracts this year and next, with most of their rates below the $9,000 mark.
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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.