Construction workers don't just wear hard hats while debris is falling. They wear them until they leave the danger zone.
For investors inclined to remove their protective gear and build positions in the battered dry bulk sector, Diana Shipping (NYSE: DSX ) wishes to remind you that 1,000-foot-long cargo vessels may still be falling from the sky.
Don't let Diana's seemingly impervious second-quarter profitability give you a false sense of security: This industry is still in the throes of an epic oversupply crisis. Only by means of a high-quality portfolio of long-term charter contracts with heavy hitters like BHP Billiton (NYSE: BHP ) and Cargill International -- plus a modest, fully booked fleet expansion that grew revenues by 15% -- was Diana able to achieve a year-over-year improvement in net earnings to $33.9 million. Sweet-talking DryShips (Nasdaq: DRYS ) was not so fortunate.
Meanwhile, the world's fleet of Capesize carriers, in particular, has grown bloated to the point that some July contracts were reported below the level of daily operating costs, an unwelcome phenomenon not seen since the initial paralysis of the global financial crisis. According to Lloyd's List, one Capesize vessel was even hired at a mind-boggling rate of $0 per day. The prevailing charter rate dipped well below $15,000 per day during the month, and it actually became cheaper to charter a massive 175,000-deadweight ton Capesize vessel than a 30,000-dwt Handysize carrier (about 80% smaller by displacement) like those in Genco Shipping & Trading's (NYSE: GNK ) diverse fleet.
If I were a small-time ore producer, I would hire the Capesize vessel just to look cool.
I joke, but this is serious business. Following about a 28% fleet expansion in 2009, the Capesize tonnage delivered during the first four months of 2010 already surpassed the full-year expansion of all previous years apart from 2009. Operators like Navios Maritime Holdings (NYSE: NM ) may find some measure of insulation by booking charter agreements for pending construction -- not to mention by diversifying into other segments of the marine cargo trade -- but for the industry at large this remains a treacherous time. Add to this existing market stress the fact that Brazilian miner Vale (NYSE: VALE ) is building a $10 billion fleet of the world's largest ore carriers (33 of them!), and you have a supply glut that will not be smoothly absorbed.
This is precisely why Diana Shipping warned investors more than one year ago that the industry faced momentous challenges. Unfortunately, Diana's latest commentary conveys none of the optimism that the company had hoped would have returned to the industry by now. Updating that cautious outlook, Diana says: "the industry is witnessing a significant order book of new vessels to be delivered in the next two years, which may create further pressure on charter rates and vessel values." That's a tough break for highly leveraged operators, but precisely what Diana Shipping has been positioning for all along. I continue to recommend Diana Shipping as the safest play on the high seas.