Plagued by overcapacity, dry shipping rates for things such as iron ore, grains, and coal have taken quite a beating the last few years. Stock prices of many shipping companies have likewise plummeted to record lows. Some of them now trade at a fraction of their book values as low rates make it difficult for shippers to turn a profit. However, that grim situation may now be changing for the better.
Huge surge in shipping rates
The Baltic Dry Index, which measures the dry-shipped goods' shipping rates by sea, saw a 19% jump last week -- the biggest jump in more than two years. So far this week it's looking like another record -- up another 20% as of September 12 for a 43% rise in just the last two weeks. Demand for iron ore out of China seems to be causing surge, and China's seasonally strongest period for the commodity doesn't even begin until October. Soy and grain exports have been predicted to rise through the end of the year as well, according to US Department of Agriculture. If that proves true, expect shipping rates to keep rising.
How to invest in response to surging shipping rates
All other things being equal, every additional dollar in shipping rates falls directly to a shipper's bottom line. Rising rates can make an enormous impact on shipping companies' financials; just as falling rates hurt them, rising rates can make them go right back up.
DryShips (DRYS) is easily the most famous dry shipping compnay, and perhaps one of the least risky ways to invest in shipping. Over 75% of its sales as of last quarter actually come from its drilling business. Analysts already expect the company's 2014 to be well into the black, so any extra rate increases should make a material percentage increase in its bottom line. DryShips currently trades at less than half book value. Before the collapse in 2008, it traded as high as over $100 per share.
Diana Shipping (DSX 1.72%) is pure investment in dry shipping. The company transports dry bulk cargoes worldwide, including commodities such as iron ore, coal, grain, and other materials. Analysts have yet to respond to the rate increases, but no doubt more of them will be raising their 2014 EPS estimates shortly. Diana Shipping trades around 20% below book value now; back in its heyday, it traded north of $40 per share.
Navios Maritime Holdings (NYSE: NM) has two operating segments: shipping and logistics. Analysts have already begun to raise their profit estimates for 2014, currently at $0.11 EPS up from $0.01 a week ago. Expect that number to continue to rise dramatically. Navios pays a $0.06 per share quarterly dividend and trades around 40% below its book value. It used to trade as high as $17 back in 2007.
Investors should pay close attention to the Baltic Dry Index which changes once a day, to see whether shipping rates suddenly change. If they continue to climb, it will be a positive game-changer for many shipping stocks' fundamentals.
Diana Shipping, which is my favorite of the group today, since it tends to be more focused on shipping iron ore than its peers. A return to higher shipping rates could also herald a return to this and other shippers' previous strong financial performance.