How Does the CEO of DryShips Respond to Industry Warning Signs?

An interview with George Economou of DryShips, Inc. reveals some interesting insights.

Nickey Friedman
Nickey Friedman
Mar 31, 2014 at 8:31PM

CEO George Economou of DryShips (NASDAQ:DRYS) has built up a reputation over the years of being an eternal optimist. Sometimes he's ahead of the curve, but other times he's behind it. Either way, his observations and insights are usually fascinating... at least from the glass-half-full perspective. In a recent interview, Economou had a number of thought-provoking responses to new industry concerns that might affect not only DryShips, but other dry shippers such as Navios Maritime Partners (NYSE:NMM), Diana Shipping (NYSE:DSX), Baltic Trading Limited (UNKNOWN:BALT.DL), and Star Bulk Carriers (NASDAQ:SBLK) as well.

Source: DryShips

The new concerns
In that interview, Barry Parker voiced a number of concerns that have recently emerged in the dry shipping industry that could negatively affect rates. Among them is a slowdown in China's GDP, large steel stockpiles, a decrease in iron ore prices, and lower Capesize rates (which are the ships that most often transport iron ore to China).

China has been the No. 1 driver of shipping rates in recent years. Parker points out that this one country accounts for 70% of the world's iron ore imports. The concern is that if China's economy gets soft then so will its volume of iron ore shipments. The high stockpiles would have to be worked off, which could lead to an even slower volume of shipments. Low iron ore prices would foreshadow what was to come.

Economou calls bull
It is not surprising that Economou thinks that the "notion of a Chinese slowdown and its potential implications have been blown out of proportion." He points out that even with a reduction, growth in China would still be robust, especially compared to the rest of the world. That is, growth is still growth, which will lead to an increase in shipment volume. Economou also thinks that China still has a long way to go before peaking, and that even with a moderate economic slowdown, projects will still come to fruition.

He also notes that steel production was up 7.5% last year, and that production so far this year has been even higher, despite the high stockpiles, suggesting that they aren't discouraging shipments. Imports last year were 820 million tons; they are expected to rise to 900 million tons this year and 1 billion next year. Lower iron ore prices will actually work in favor of shippers because imported iron ore competes with domestically produced Chinese iron ore which is expensive to produce.

For example, last year there were 1,424 million tons of domestic production compared to 820 million in imported ore. This means that about two out of three tons of demand was domestically produced. Domestic Chinese iron ore has less than half the actual iron content on average than imported ore, and is much more polluting, something the Chinese government is starting to combat, which could spur imports of iron ore regardless of the economic picture.

Preparing DryShips
Economou says he will continue to back up his outlook by positioning DryShips to take advantage of higher daily spot rates. He will do this by letting fixed rate contracts expire without renewing them and by keeping his fleet exposed to the daily spot rate fluctuation, which he expects to trend higher. As he says in the interview with Parker, "No one has a crystal ball, but we have every reason to believe that the fundamentals for the dry bulk market are quite clear and point to a stronger market ahead."

Foolish final thoughts
In the conclusion of the interview, Economou points out that only 90 Capesize ships are expected to be delivered this year, and another 90 next year, worldwide, yet he calculates that each year the world will need 110 Capesize ships, leaving a sizable shortage in supply. The result could be a "hot" market over the next three months, a "red hot" market in the fourth quarter, and for 2015 to "explode." It will be interesting to see if he's right this time around. Follow the daily spot rate environment to find out.