Bulking Up for a Dry Bulk Recovery

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These remain treacherous times for the seaborne carriers of commodities called dry bulk shippers. While industry leaders gather in New York City to discuss the challenges, one intrepid shipper is boldly throttling up to position itself for long-term recovery of commodity demand.

The topics at the annual Big Apple gathering called "Marine Money Week" highlight the massive shift of fortunes that has befallen the industry since the boom times of yesteryear. This year's theme is "liquidity, liquidity, liquidity," described as the "single most important key to success for a shipowner the next 12 months." One session will pose the question: "Have we really survived the worst?"

Ever since the perfect storm of crunching credit and disrupted demand slammed shippers last year, I have touted Diana Shipping (NYSE: DSX  ) and Navios Maritime Holdings (NYSE: NM  ) as viable contenders to ride out the crisis. I selected them on the basis of smaller debt relative to peers, and their strong long-term charter coverage for existing vessels. I found Navios' counter-cyclical growth spurt -- involving seven new Capesize carriers -- an acceptable risk given that the ships were already chartered out and covered by contract default insurance to boot.

This week, Navios surprised this Fool by announcing the addition of four new massive vessels to that already aggressive order book.

After Diana Shipping's stark warning last month regarding excessive orders for new tonnage that must be purged from the industry to stave off a looming financial disaster, I am concerned that a new, more modest baseline for global commodity demand could fail to support such sizable additions to the global fleet for Capesize vessels (the largest bulk carriers made).

Capesize carriers are used primarily for carrying coal and iron ore, and I remain bullish on long-term demand for these products with respect to Asia and other emerging economies. However, China spilled some milk on that picture this week with the discovery of a 3 billion-ton deposit of iron ore in the Liaoning Province (near Beijing). 

Although not of grades matching the rich ores of Brazil and Australia, the deposit could still impact long-term import demand for the Chinese steel industry, and therefore reduce shipments for major global suppliers like BHP Billiton (NYSE: BHP  ) , Rio Tinto (NYSE: RTP  ) , and Vale (NYSE: VALE  ) .

Navios has long-term contracts in place for these new additions as well, promises a $43 million boost to annual EBITDA from the four vessels, and will issue convertible shares to fund the purchase. By continuing to avoid excessive debt loads and employing ships before they're delivered, Navios remains more seaworthy than competitors like DryShips (Nasdaq: DRYS  ) and Excel Maritime Carriers (NYSE: EXM  ) . Nonetheless, the scale of Navios' construction pipeline now must garner continued Foolish scrutiny.

Further Foolishness:

The "Dry Bulk Shipping" tag within Motley Fool CAPS lists 16 companies. Join our online community today and share your views on this sector. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts 1,000 times smaller than dry bulk carriers. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of BHP Billiton, Diana Shipping, and Vale. The Motley Fool has a seaworthy disclosure policy.

Read/Post Comments (7) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2009, at 5:33 PM, Seano67 wrote:

    Yeah, I don't understand what the heck Navios is doing. I mean in this kind of global economy and credit crunch, why in the name of Neptune's ghost buy even *more* ships, especially when you have to fund that with a new share issuance? That seems so counter-intuitive that it's maybe either brilliance or insanity.

  • Report this Comment On June 24, 2009, at 6:24 PM, XMFSinchiruna wrote:

    Sean ... I couldn't agree more ... it's either "brilliance or insanity". Very well said! :)

  • Report this Comment On June 26, 2009, at 5:37 PM, brewer12345 wrote:

    The ships have very long term charters which are guaranteed by a AA+ rated counterparty and Navios is buying them out of foreclosure. The existing charters more than pay for the ships and Navios is putting up very little cash in the deal. Its a slam dunk.

  • Report this Comment On June 26, 2009, at 5:44 PM, ChannelDunlap wrote:

    I would assume they're getting a good deal right now. Kind of the opposite of DRYS buying a few ships brand new at the peak of the oil wave. Thanks for this article. I've played both EXM and DRYS a couple of times, I'll have to look into these guys.

  • Report this Comment On June 29, 2009, at 1:24 PM, alienkeeper wrote:

    Think it is a sound and solid investment and in the long run it is, "Very Cost Effective"

  • Report this Comment On September 19, 2009, at 8:15 AM, sean89928 wrote:

    Great move by Navios.

    No risk on their side as the Capes are all chartered out and insured. And what it does do is ratchet up the pressure on other shippers who are exposed to the spot market.

    Keep buying contracted ships Navios and over-supply will arrive earlier which will knock the debt ridden companies out of the game.


  • Report this Comment On November 12, 2009, at 3:44 PM, Schwab711 wrote:

    They paid for these ships with warrants covertible at $10-14 a share (which is acceptable dillution considering your stock appreciation to get there) and loan rates of 4-7%. How did Navios Maritime buy undervalued vessels with little to no cash or stock, little risk (chartered out and insured) and with an interest rate of 4-7% in a credit crisis!

    Their management kicked ass this year and they positioned themselves to be a dry-bulk leader in years to come.

    Oh yah, how does a relatively safe 4.5% yield sound to go with it?

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