Even though Dryships (NASDAQ:DRYS), Navios Maritime Holdings (NYSE:NM), and Safe Bulkers (NYSE:SB) all agree that a rally in global dry shipping rates will arrive in the coming months, they disagree on something that's been holding it up and how each will benefit. One of the two things in particular could leave Safe Bulkers' shareholders very disappointed.
What they agree on
DryShips, Navios Maritime Holdings, and Safe Bulkers agree that 2014 will be a "second half story." While the first half of the year was a bit below expectations, for the most part it was within the realm of possibilities and still up by a good clip on a year-over-year basis.
The perfect storm that they see, in a vision shared by many in the industry, is escalating demand for iron ore from China coupled with the forced closing of mines within China. Many of China's mines cost more than $100 per ton to extract; as DryShips, Navios Maritime Holdings, and Safe Bulkers point out, they'll be forced to close and have to turn to increasing its already fiery hot amount of imports.
As for exact timing, neither DryShips, Navios Maritime Holdings, nor Safe Bulkers have an answer, but all three think that the party will begin some time in the third quarter onward. Safe Bulkers detailed in its conference call that whether it is in July, August, or September remains to be seen, "but it will happen like it happened last year." Last year around late August, global rates for ships rose multitudes.
Where they begin to part ways
When questioned about the delays so far, DryShips calmly explains in its public releases that the rainy season in South America was delayed along with further increases in Brazilian supplies of iron ore. Iron ore shipping demand and volumes did indeed increase for the first half of the year, but as Navios Maritime Holdings explained in its call, much of that came from Australia (which is around half the shipping distance of Brazil.)
While there is no evidence that Safe Bulkers disagrees with any of this necessarily, the company mentioned in its conference call that there is a lag between iron ore price declines and higher volume shipments. Safe Bulkers also cited the stockpiles of iron ore at Chinese ports – at 110 million tons last count – as causing weakness in demand for iron ore itself despite record steel production.
Navios Maritime Holdings disagrees. In its conference call, it was pointed out that the so-called stockpiles, while at record levels, only represents 27 days worth of iron ore inventory consumption for China and is right in line with the five-year average. In short, not only are the stockpiles not a concern, but they aren't even out of the ordinary according to Navios Maritime Holdings.
The second item of disagreement involves the Panamax-size ships. Safe Bulkers noted in its conference call that it is depending on the larger ships, the Capesize, to push the global rates upward for the entire freight market. Safe Bulkers' fleet is mostly small ships, so its benefit from iron ore shipments is mostly indirect at best.
The conventional wisdom in the dry shipping market is that rising rates for Capesize ships lifts all boats. The theory is that if the Capesize rates rise too high above the smaller boats, companies will just simply divide their cargo between two smaller ships to save money rather than using one large ship.
George Economou, CEO of DryShips, disagrees. While he acknowledges that it makes logical sense on the surface that if rates are more than double for ships that are twice the size, he points out that there are very few Capesize ships that operate based on daily spot rates compared to the spot Panamax market; there aren't enough there to even make much of a difference. As evidence, he points to the period from 2004 to 2008 when we saw similar dynamics and often the Capesize ships would be 3, 4, and even 5 times the rate of the half-size Panamax ships.
If DryShips is correct, Safe Bulkers is in for an unpleasant surprise. The iron ore shipping market could get red hot as DryShips and Navios Maritime Holdings expects, but the benefits to Safe Bulkers may be somewhat muted. What's more is that the logic behind the stockpiles being too high as cited by Safe Bulkers doesn't seem to make sense; perhaps Safe Bulkers isn't the most reliable in explaining current industry dynamics. However, the jury is still out either way.