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The maritime queen of adaptability has done it again.
Before pouncing deliberately upon the historic opportunities that this epic market disruption in the dry bulk world is likely to present to the most resilient fleet managers, Diana Shipping (NYSE: DSX ) is exercising the kind of patience that Charles Darwin required to comprehend the dynamics of natural selection through years of astute observation. It takes no stretch of the imagination to compare Diana to Darwin, as Diana has now exhibited four distinct qualities over the past couple of years that Darwin either possessed or would have admired: patience, adaptability, resilience, and the courage to promote unpopular opinions with the conviction of a careful observer.
Diana turned in yet another profitable quarter to close out 2009. A 30% drop in operating revenue for the fourth quarter came as no surprise, since prevailing charter rates for 2009 were 32% off their lofty 2008 average. Under the circumstances, I consider quarterly earnings of $27.6 million and a fleet utilization rate of 98.9% more than adequate to sustain my conviction that Diana remains the unrivaled beauty of the dry bulk pageant. Rival Navios Maritime Holdings (NYSE: NM ) , meanwhile, missed expectations earlier this week with earnings of just $12.5 million.
The bottom comes into view
As if peering through a glass-bottomed hull, the straight-talking management at Diana Shipping can begin to see a bottom for the global dry bulk industry coming into view over the next couple of years. Against the optimism I routinely observe among investors that such a bottom may already be in place, the company's rather drab medium-term outlook for the industry is commonly overlooked in favor of more bullish commentary from the likes of DryShips (Nasdaq: DRYS ) . I understand the natural bias toward rosier outlooks, but under the circumstances I believe there is nothing more comforting than a Capesize dose of caution and opportunism.
The way I see it, investors in the dry bulk space are being lulled into a false sense of security by the bullish expectations for growth in demand for worldwide shipments in principal dry bulk freights like iron ore and coal. It's true: Shipping volumes for iron ore will likely increase by 11%-15% during 2010, with nearly two-thirds of a total 1 billion tons bound for -- you guessed it -- China.
Coking coal export volumes appear set to rise 3% to 215 million tons. Reports that India is looking to Russia for supply shed light upon a tightening supply crunch under way in Australia. Eager to satisfy this enormous demand from Pan-Asian importers, miners like Teck Resources (NYSE: TCK ) are expanding production volumes aggressively for 2010. Diana expects worldwide thermal coal exports of about 600 million tons for a 2% increase. Combined, this added coal demand represents the equivalent carrying capacity of about 120 Panamax vessels.
That sounds great, right? When you toss in all the other freight categories, the expectation of 230 million tons of new dry bulk demand for 2010 sounds like just the cure for the anticipated glut of new vessels coming into the fleet. Unfortunately, in the opinion of Diana Shipping CEO Simeon Palios: "We believe that the actual deliveries of dry bulk vessels in the next two years will not be easily absorbed by the market."
Before Fools dismiss such a view as overly pessimistic, the time has come for us to delve into the dynamics of predicting net fleet expansion from a notoriously massive orderbook for new vessel constructions.
The nitty-gritty of net fleet expansion
As of January, the total orderbook for new dry bulk vessels stood at a breathtaking 84% of the current worldwide fleet. After analyzing expectations for dry bulk cargo demand, charter rates, port congestion, the attrition rate (the proportion of ordered vessels that will be canceled prior to delivery), and the impact of vessels relegated to the scrap yard, Diana President Anastassis Margaronis anticipates a net worldwide fleet expansion of 320 million deadweight tons (dwt) during 2010. At 39% greater than the anticipated increase in demand discussed above, you can begin to see why Diana is content to remain patient for superior opportunities to purchase vessels at distressed valuations over the next two years.
I found Margaronis' discussion of port congestion particularly enlightening. Citing an estimate by Maersk that about 173 Panamax and Capesize carriers are waiting outside of Australia's bottlenecked export terminals, he expects port congestion to "dominate the short-term imbalance between supply and demand." For 2010, as much as 5% of the world's dry bulk carrying capacity could be paralyzed by port congestion.
As I outlined in this report about thermal coal, miners like BHP Billiton (NYSE: BHP ) and Peabody Energy (NYSE: BTU ) are racing to ramp up port handling capacity in Australia. Brookfield Infrastructure Partners (NYSE: BIP ) , meanwhile, offers a compelling investment vehicle for exposure to one of the largest coal export facilities in Australia.
Preparing to pounce
While waiting for the full impact of this vessel oversupply to impact vessel valuations, Diana has initiated a 24-month growth strategy with the December acquisition of Panamax carrier MV Melite. To execute its strategy, Diana enjoys a treasury adorned with $282 million in cash, and a manageable debt burden beneath 30% of the book value of its fleet. Combining cash in reserve, available credit, and anticipated cash flow, Diana expects to muster $500 million to $700 million for opportunistic vessel acquisitions.
With a simultaneous foray into the containership space with a $50 million venture, Diana is preparing to move with a sort of discipline and forethought that leaves this long-term shareholder sleeping well at night. I look forward to hearing your thoughts in the comments section below.