Dsx Ships
Source: Diana Shipping.

During the commodity boom of 2006 and 2007, shipping companies like Diana Shipping (NYSE:DSX) had seemingly limitless prospects, with huge demand for transporting key goods and natural resources across the globe to meet hungry, high-growth emerging-market economies. Yet when the financial crisis struck in 2008, bringing a global recession in its wake, Diana and peers DryShips (NASDAQ:DRYS) and Navios Maritime Partners (NYSE:NMM) were left struggling to survive a glut of vessels all competing for less business. And even though the industry seemed to have weathered the storm last year, 2014 has given Diana Shipping more challenges to overcome, and its share price has once again fallen back as investors weigh whether the shipping company can keep moving forward through tough conditions. Let's take a closer look at Diana Shipping to see whether its latest stock decline is a buying opportunity.

Stats on Diana Shipping

2014 YTD Return

(26.6%)

Expected 2014 Revenue Growth

9.7%

Expected 2014 EPS Growth

NM*

Expected 5-Year Growth Rate

16%

Source: Yahoo! Finance. *NM = not meaningful; Diana is expected to post a profit in 2014 after a 2013 loss.

Why Diana Shipping has sailed on rough seas
Diana Shipping came into 2014 with a great deal of enthusiasm. Many investors expected a long-awaited recovery in dry-bulk shipping, prompting anticipatory share price gains last year in the industry. Last November, Diana Shipping President Anastasios Margaronis argued that continued growth in China and rising demand for commodities in India would finally lead to a turnaround in the industry; company executives even considered restoring dividend payments in the near future.

Yet things haven't panned out that well for Diana Shipping in 2014. Early in the year, normal seasonal effects pushed dayrates downward, but the company also identified structural problems with China's financial system that could have devastating impacts on the shipping industry. Even as DryShips remained optimistic about the industry's prospects, Diana threw cold water on the bull case for shipping, and it has locked in more fixed-rate contracts despite relatively low prices in order to reduce exposure to future weakness.

Dsx One Ship
Source: Diana Shipping.

What's next for Diana Shipping?
The leading question for Diana Shipping is whether shipments of iron ore and other key commodities will rise. Recently, stockpiles of iron ore among Chinese steel producers have fallen to low levels even as the industry there plans to ramp up overall production. With the Chinese government expanding its efforts to promote infrastructure investment and other projects, Diana expects increases in iron-ore trade to outpace rising shipping capacity, and that could push prices higher. Nevertheless, Diana CEO Simeon Palios said he believes "we're going to have too many ships in the market over the next 18 to 24 months," as more vessels become available and add to the pressure on contract rates.

One wild card is the pace at which older, less efficient ships are scrapped. Navios Maritime Partners CEO Angeliki Frangou has said he expects to see more aggressive moves by shipping companies to replace outdated ships with newer vessels. Yet Diana Shipping's executives point to substantial portions of the global shipping fleet that are more than 20 years old, which many industry analysts expected would be a natural lifespan for aging vessels. With scrapping occurring at a slower pace despite low rates that would ordinarily encourage more scrapping, it's hard to have confidence that vessel supply will fall as quickly as bullish players like Navios and DryShips expect.

Diana Shipping shareholders face an uncertain environment in which their initial hopes for a quicker recovery have been crushed by the realities of the market. While there are signs that plunging commodity markets have hit bottom, Diana Shipping must see those initial signs turn into real demand in order to drive up shipping activity and produce sustainable rate increases that can improve profits. Until that happens, it'll be hard for Diana Shipping shares to get back on track.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.