Chief shipping analyst Peter Sand of the Baltic and International Maritime Council, or BIMCO, shared some interesting insights that investors in DryShips (DRYS), Diana Shipping (DSX 0.51%), Navios Maritime Partners (NYSE: NMM), Baltic Trading Limited (NYSE: BALT), and Star Bulk Carriers (SBLK 3.63%) and others should pay attention to. Though Sand is optimistic about 2014 overall, there is one issue in particular that is of concern.
Good year ahead
In a recent interview with Hellenic Shipping News Worldwide, Sand was quick to dismiss the weak first two months of the year, citing low rates as widely expected and therefore not much of an indicator. He sees rates improving going forward for the balance of the year: "On the average freight rates levels we have already seen 2013 was better than 2012. BIMCO expect 2014, to become better than 2013 in that sense."
Sand still expects even higher rates in 2014 over 2013 despite the fact that rates have plunged to near the same levels as last year. He points out that in periods of declining rates they tend to "undershoot" to the downside. It may remind you of an oversold stock in the stock market. Similar thing.
BIMCO and Sand expect iron ore and coal shipments to rebound in the second quarter followed by grain in the third and fourth quarters.
An interesting aspect affecting rates and the global supply problems of ships is what Sand calls "slow steaming." Rising fuel costs results in ships traveling at a slower pace in order to maximum their fuel economy, or miles per gallon. As fuel prices rise, Sand reasons, ships will travel slower and more efficiently as fuel costs overtake other operating costs at higher speeds. The slower speed and longer trips lowers the availability of ships for hire at any one time and helps raise rates.
It's a double-edged sword, Sand warns. As rates rise higher, they increase the profit margins of the trips and lower the need for slow steaming. Unlike other areas of the global supply equation such as the physical availability of ships, the change from slow steaming to faster moving means the same ships can adjust their speed and affect global supply at a moment's notice in reaction to a change in fuel prices. Ship speed is a bigger factor to the global supply than even demolitions.
Though BIMCO still expects a positive 2014, it believes "see a winding and potentially long road back to a fully sustainable market." The organization estimates that there still exists an oversupply problem by 20%-25%. A problem for the industry that expects demolition of old ships to bail out the overhang is that rising rates make using the very old ships more attractive rather than scrapping them. BIMCO expects scrapping will actually drop by 33% this year by tonnage compared to last year.
Foolish final thoughts
While BIMCO and Peter Sand see a better 2014, they also believe it's not a lock and the extent of the recovery may not be as strong as some of these companies such as DryShips, Diana Shipping, Navios Maritime Partners, Baltic Trading Limited, or Star Bulk Carriers hope and expect. The takeaway from Sand is to closely watch demolition rates and fuel prices in 2014 that could slow down a recovery. In a perfect world for dry shippers, fuel prices will actually go up at the same time as increased demolitions.