For January and most of February this year, the rate environment for dry shippers was a disaster. While seasonality definitely played a role, there are a number of other factors that Baltic Trading Limited (NYSE: BALT) pointed out in its recent quarterly call that DryShips (NASDAQ:DRYS) failed to mention.
DryShips is confident that the global ship supply situation has taken a turn for the best. CEO George Economou stated, "Following a period of oversupply the recent volatility in the tanker and drybulk sectors is a clear sign of a balanced supply demand picture." DryShips is "optimistic and expect[s] a sustainable recovery in 2014 and beyond." DryShips is calling for an "imminent market recovery."
Baltic Trading Limited likewise expects that supply will go down. Executive Apostolos Zafolias points out that deliveries for new ships have seen a substantial "deceleration," down 37% in 2013 compared to 2012. What's more, 2013 saw the lowest overall fleet growth since 2003 at 6%. Zafolias expects further deceleration in the global supply over the next two years.
Where DryShips and Baltic Trading Limited appear to start to bump heads is over their observations about January. Zafolias in part blamed the sharp decline in shipping rates for that month on "increased vessel deliveries for the first month of the year." This appears to be in contrast to the "balanced supply demand" picture according to DryShips.
Regardless of historical observation, what's important is that both DryShips and Baltic Trading Limited expect supply to be tight. However, that doesn't mean you should ignore the supply picture. Diana Shipping (NYSE:DSX) is also fairly confident that rates will rise for the year, but the company warns that it is conditional upon "newbuilding orders [that] do not flood the markets with vessels."
Diana Shipping believes the supply situation will be favorable to the industry, but that could change if orders go up in response to increasing demand. A flood of vessels, Diana Shipping reasons, would absorb the effects of increased demand and keep rates from rising.
Other demand factors that caused rates to suffer
The unusually harsh and cold weather didn't just affect the United States. According to Baltic Trading Limited, it stifled steel production in China as well, and worse than the regular seasonal decline at that. What's more, "weather-related disruptions in Brazil and Australia" were blamed for affecting rates as well.
There were two more major factors that played a negative role, according to Baltic Trading Limited, both of which DryShips failed to mention. The first is an "export ban of unprocessed raw materials imposed in Indonesia has stalled nickel ore and bauxite exports."
The second is "coal exports out of Drummond Colombian mines have been suspended as new rules relating to the loading and discharging of coal cargoes were imposed at the beginning of January."
Baltic Trading views these factors as temporary but "hard to predict the timing and impact of a reversal."
Another demand angle
On the more positive side, and not often mentioned by anybody, is "China's increased efforts to curb pollution by regulating high-emission industries like the steel production could benefit drybulk trade." Baltic Trading Limited reasons that the iron ore in of China is of low quality, so this puts higher demand pressure on imports of iron ore to the country.
This is very encouraging because it means iron ore shipping demand growth should actually outpace the country's demand for iron ore itself (think of it as foreign countries taking market share of the iron ore market itself).
Foolish final thoughts
As a dry shipping investor, it's always a good idea to read as many earnings reports and listen to as many conference calls as you can, even from those companies that you aren't invested in. Investors in just DryShips, Baltic Trading Limited, or Diana Shipping can often learn a lot about the industry by gathering information from each company.