As the prices of dry bulk commodities such as coal and iron ore have slumped during the past few years, miners have responded by ramping up output to prevent profits from collapsing. As a result, the demand for bulk carriers to transport the higher tonnage of commodities has been rising. Long-term this will be great news for dry bulk shipping companies such as Diana (NYSE:DSX), DryShips (NASDAQ:DRYS), and Navios Maritime Partners (NYSE: NMM).
It's not just the volume of iron and coal shipped that is rising. True, during May of last year a record 37 million metric tonnes of iron ore was exported to China, but since then it has been revealed that the total value of China's trade during 2013 was $400 billion, making the nation the largest trader of goods on earth, and imports of everything from cotton to gold are surging into the country. Indeed, this record figure was driven by a 10% rise in iron ore imports and a 8% rise in Soybean imports, and the value of China's imports are set to rise again this year.
Getting it there
All in all, as already mentioned, this is great news for dry bulk shipping companies. The greater the volume of dry bulk heading toward China, and indeed around the world, the greater the demand for boats, which will ultimately lead to higher shipping rates.
Unfortunately, after reaching a two-year high at the end of last year, the Baltic Dry Index, which reflects the daily charter rate for vessels carrying cargoes such as iron ore, coal, and grain has collapsed, making shipping investors nervous. However, I believe that this could be a great buying opportunity.
For example, while dry bulk rates are under pressure at present, there are some indications to suggest that the market is in the process of staging a full recovery. According to Clarkson, the world's leading provider of integrated shipping services, during 2013 the total amount of dry bulk cargo shipped around the world jumped 5.4% year on year, while total seaborne trade increased 3.8%. This rate of growth was close to the average annual growth rate of the last 50 years. What's more, Clarkson reported a great improvement (decline) in the number of new builds delivered to the market during 2013.
A chronic oversupply of ships has been one of the reasons that the shipping industry has remained so depressed during the past few years. Hundreds of new ships were purchased with cheap credit in the run-up to the financial crisis when the industry was booming, and this overhang has kept the market depressed. However, now it appears that these order books are starting to run dry. In particular, the tanker and bulk carrier fleet grew 4.3% during 2013, roughly in line with the growth of global trade. In comparison, during 2009, 2010, 2011, and 2012, the four years when global trade remained depressed, the fleet expanded 8.4%, 10.7%, 10.4%, and 7.3% respectively.
With dry bulk volumes heading to China increasing and the global fleet shrinking, Diana Shipping, DryShips, and Navios Maritime Partners are well placed to ride a recovery. Diana has a fleet of 35 dry bulk vessels, and currently only two of these Panamax vessels are employed by Rio Tinto; the rest are employed by agricultural trading houses such as Cargill and EDF Trading. Actually, one of the vessels was only recently hired by Rio, which could indicate a rising demand for the vessels. Still, the company has a number of new vessels entering its fleet over the next few quarters, and these could be quickly snapped up by miners. On the safer side of things, Navios Maritime Partners operates under fixed-rate, long-term contracts. In fact, 74% of its available days are already contracted out for 2014, and CFO Efstratios Desypris pointed out, during the fourth quarter earnings conference call that over 92% of the company's contracted revenue is for over three years. Navios Maritime's average charter-out rate for its vessels is $24,233 for 2014, well above the current spot rates for all types of dry bulk vessels.
So all in all, after years of turmoil, it would appear that the dry bulk is in the process of a recovery. Even though the Baltic Dry index has collapsed during the space of the past few months, the volume of cargo transported by dry bulk carries continues to rise. Additionally, the industry is starting to see some relief from the chronic oversupply of boats that it has had to grapple with during the past few years. Overall, this market's outlook is improving.