It's hard to fault Diana Shipping (DSX -4.45%), DryShips (DRYS), or Navios Maritime Partners (NYSE: NMM) for "missing" analyst estimates. Sure, nobody likes to see that, but with each company's contract details spelled out literally to the dollar months before their report, it would seem to be more of the fault of poor analysis from analysts rather than company shortfall. For Diana Shipping, the most important information is what came out of its conference call.
Navios Maritime Partners was first of the major public dry shipping companies to report its results this season. With its conference call, CEO Angeliki Frangou and CFO Efstratios Desypris gave an extremely optimistic and confident view of the dry shipping industry for 2014.
In the third quarter, Frangou said, "The drybulk environment has brightened significantly." She repeated that statement verbatim in the fourth-quarter report. She and Navios believe "the cycle is turning," and the company is prepared to put its money where its mouth is. Navios currently pays a handsome quarterly dividend, has committed to that dividend through the end of 2015, and "will be positioned to increase distributions in the medium term."
Overall, Navios Maritime Partners painted quite an optimistic picture. But it is only one shipper which is why it's important to hear what Diana Shipping, DryShips, and others have to say. Diana was the second in the group and is known to operate and speak more cautiously.
Diana Shipping was second
Diana Shipping president Anastasios Margaronis started out with the obvious. For those who haven't been watching, the shipping rates for the industry have been all over the map, beyond what would be normal seasonality. Rates have made giant swings upwards through last December only to be followed by hard crashes of 40%-80%, depending on the type of ship.
Margaronis warns of the "unofficial banking sector in China which appears to be responsible for just under $3 trillion in loans and debt obligations." He believes the dry shipping industry is at the mercy of this informal sector. Cheap credit and government spending, Anastasios believes, can't last forever and a breakdown is "unthinkable." This implies that a hard crash could be in the cards.
This is in line with what Castalia Advisors recommends investors pay closest attention to. Past rallies in shipping rates, as we saw in late 2013, were the result of "Unofficial Economic Stimulus" from the China Development Bank, according to the firm.
In short, Margaronis and Castalia Advisors fear that there is a bubble in China's economy that could burst and cause epic problems for the dry shipping industry unless the country transforms its economy into one that relies on a "sustainable and realistic model" instead of just credit.
This bodes negatively not just for Diana Shipping, Navios Maritime Partners, and DryShips, but also for every company in the industry.
In the short term, Diana Shipping expects increases in volumes of shipments and rates for all sorts of commodities as long as "newbuilding orders do not flood the markets with vessels." In other words, if the supply of newly built ships increases too much, it could fully dilute the effect of increased demand; also to that end, the company believes that it will need to pick up the pace of scrapping old ships. The extra supply also could kill what otherwise would be spikes in rates from increased demand.
Foolish final thoughts
After listening to the Navios conference call, you may feel the urge to jump in with both feet and grab as many shares as you can of the company and its peers in the industry. Conversely, after listening to the Diana Shipping call, you may feel the urge to hold on to a life preserver instead. The takeaway here seems to be that rates will go up in the short term, but investors should keep a close eye on China for the medium and long term perspectives. Fools investing in this industry do so at extreme long-term risk. Pay daily, close attention to shipping rates and economic news from China, and avoid finding yourself on a sinking ship should that time come.