Drybulk Shipping: Prepare for a New Record High

by: Kristian Rasberg posted on: June 27, 2008 | about stocks: DRYS / DSX / ESEA / EXM / FREE / GDOCF.PK / GNK / NM / OCNF / PRGN / QMAR / SBLK / TBSI    

As reasoned in my previous article, the drybulk fundamentals remain healthy; in the following months, we witnessed a 100% increase in the drybulk rates. After hitting a new record high late in May, with BDI at an amazing 11,793 points, the market was steady for two weeks before dropping heavy in the latter half of June. In just a matter of days the the BDI plunged about 15%, once again terrifying the stock market. Since the end of June the drybulk rates have been increasing after BDI hit a low of 9,139, wich represented a 22.5% drop in only 5 weeks. The January drop was thought by some to be a one-off, but in this highly volatile business nothing but the extraordinary is to be expected. This is drybulk shipping; volatility alert!

What happened this time?

The sudden drop was triggered by capesize vessels released into the Pacific market. This turned the short-term psychology bearish, and the charterers took a rare time-out. Chinese officials had earlier called for import restraints following the rising iron ore stockpiles. The downturn was mainly related to the capesize market, but made a huge impact on the BDI. In the weeks before the correction the capesize rates pushed upwards outperforming the panamax rates, wich was held down by a weaker Atlantic market (farmer strikes in Argentina). At its peak the capesize:panamax ratio was at 2.87 versus a long-term average of 1.99 between the two vessel types. In these situations you will normally see charterers splitting capesize cargoes by chartering two cheaper panamaxes. However the increasing port congestion did not support cargo splits this time. The weaker panamax market proved unable to rise with the capesize rates, and the expanding capesize market was rather easy to push down short-term. At the moment the capesize:panamax ratio is 2.07 indicating that much of the obvious downside risks are less than just a few weeks ago.

It is important to note that this rate drop was related to short-term factors. This kind of volatility must be expected both on the upside and downside, and is a part of the spot market's nature. It is not a sign of any changes in the long-term demand for drybulk cargo. As in the stock market the freight market is influenced by psychology short-term. When the utilization is 99% any minor changes short-term will have a major impact on the spot rates. The long-term time charters were in fact barely changed, opposite to what took place in the spot market both in January and June. The 1 year time charter was above the spot rate at the moment of meltdown, clearly indicating demand for vessels long-term.

Low season near record highs

After entering the traditional low season in May both the spot rates and time charters are near former record highs. As of today this still is the case, especially in the active panamax time-charter market. With the panamax spot average currently at $76,910, charterers are paying $82,000 for panamaxes 1 year with prompt delivery Atlantic and $78,000 in the Pacific market prompt. We are currently experiencing yet another counter-seasonal trend in the drybulk market. This must be ascribed to the increasing tonne-mile demand, rising congestion world wide and the strong demand in general for drybulk cargo. The well-known challenge is however the supply side, with a record high orderbook from late 2009 and early 2010.

The supply of new buildings have proved to be less than expected so far this year. The slippage is already about 25% and delays are from 3 to 6 months even at some established yards. However there are already expectations that a few capesize vessels will be 12 months delayed, as one drybulk shipper reported earlier this year. The increasing yard slippage will presumably continue, and possibly worsen as more pressure is put on subcontractors and inexperienced yards. Of the 15m dwt expected to be delivered in the first half of this year, an estimated 11.5m dwt have actually been delivered. This represents a 2.9% net fleet growth, with only one handysize scrapped. Going into the second half the new-building supply is expected to be around the same level (expected 14.5m dwt). However the numbers are conflicting since most new buildings delayed in the first half will get delivered in the second half. With further slippage in the second-half orderbook there is reason to believe that the fleet growth will be about 6% in 2008. This is in the low end of the consensus from earlier this year, wich showed up to 8% without any slippage.

Towards a new record high in Q4

The growth in iron-ore cargo is estimated to be 7.5% in 2008 and steam coal growing even more at 8.5%. So far the iron-ore trade have exceeded these expectations. The total demand growth will be higher when the tonne-mile demand is taken into account. The tonne-mile increase is hard to predict, but with the changing trade patterns the long-term trend is upward. Second half of 2007 showed a tonne-mile increase of 11%, and this trend have continued into 2008 with iron ore and coal shipped over longer distances. On the top of this the port congestion is expected to stay above 10% this year. Considering the fleet growth at 6%, slippage included, there seems to be an upside in the rates. The high season begins in the latter half of Q3 and will presumably reach its high in Q4. This positive outlook is already reflected in some degree in the freight-future market, where both capesize Q3 and Q4 is traded above the current spot rate. Q3 will prove to be good and I expect the rates to set a new record high in Q4.

Disclosure: Long in drybulk stocks at the time of writing (June 26, 2008). No investments should be done based on this article, remember to do your own research.

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Kristian Råsberg

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This article has 20 comments:

  •  
    why not
    SBLK?
    Jun 27 08:28 AM
    I agree completely. I think drybulk shipping, although volatile, is one of the safest bets in this market. If commodity prices continue to rise and percentage rates per cost of cargo for shipping remain constant, the result is greater income for shippers. On the other hand if the commodity bubble bursts, more will be shipped, again resulting in greater income for dry bulk shippers. The shippers gain either way.

    Also, the shortage and increases in prices of steel is driving up the cost of new ships. The dividend-paying stocks in this sector are looking good right now.
  •  
    MCHEAL
    Jun 27 08:29 AM
    As another article has pointed out, figure in change in fuel cost also
  •  
    billf921
    Jun 27 09:58 AM
    supply of new ships will cause rates to crater and when rates crater these stocks can fall 50 % or more.

    the ffa's all indicate lower rates in 2009 so if you think you can be th4e first guy out go ahead and buy.

    you need to add more balance to your article and mention what rates were for the last 30 years and why its different this time
  •  
    JQ
    Jun 27 10:24 AM
    Bill,
    the author's point is a record later this year. what happens next year no one knows. but as he points out:
    'The well-known challenge is however the supply side, with a record high orderbook from late 2009 and early 2010.'
    balanced or not, 2008 has been great.
  •  
    Rocky77
    Jun 27 11:02 AM
    The points made in the article are well structured and the logic is good. Yet, I feel that if the US gets more and more into inflation -it seems to be the direction and the Fed ain't doing anything about it- the global machine will 'lose momentum' and DryShipping also (in the greater picture) will get seriously affected.

    Two significant events will give us a sneak preview of what lies ahead: the Olympics in August, and the US elections: September & December 2008 are bound to be amongst the most interesting months of the, well..., decade? Maybe
  •  
    TKTK53
    Jun 27 12:00 PM
    My Website
    Kristian is correct
    Dry bulk has noware to go but up
    Ships are the only way to get the products from one place to another
    And the demand for those products is growing every day
    I purchased more when it took a dip to $12.90. A small price to pay for a stock that was at $16.71 just last month, so going by those figures you could make a fast 13% maybe even by next month
    BUT by holding it and reaping the dividens too you will be a winner
    TERRY TKTK53
  •  
    bones33
    Jun 29 10:25 PM
    The BDI will reach new records by Q4.The global demand for resources is growing exponentially.The shipyards will not be able to keep pace.Long DRYS and EXM.The forward PE for these two is below in the 5 range.Add now while still cheap.
  •  
    mariposa
    Jun 30 08:08 AM
    Question: with the pressure on shipyard for new builds, will quality slip?
    One major accident due to poor quality control could sink a shipper!
    Generally, though the biggest percentage of my portfolio is in shipping.
  •  
    The
    pessimistic
    optimist
    Jul 01 12:46 AM
    To quote a term, I think she is spot on. There is already backlog in the shipyards and then drydocking for some co's carriers. As emerging markets are still vying for large shares of iron ore and coal not to mention grains and fertilizers I concur with the predictions. Those ships within companies that are in service will be kept busy. Lest we forget oil double hull tankers and then conversion rigs. Q4 looks promising. I agree that 09 looks cloudy but not bleak. Time will tell
  •  
    blink0404
    Jul 03 12:15 PM
    As the market continues to go down, shipping, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

    the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
    www.greenfaucet.com/sh...
  •  
    stumpy
    Jul 04 09:42 AM
    Hello,
    I have owned NAT for about 4 yrs and very happy with it but looking now a a shipper that does just drybulk like coal or iron. An sugesstions please.

    Thank You
  •  
    David White
    Jul 07 10:42 AM
    stumpy: NM has an excellent PE and FPE. IT also has an excellent Price to Book Value ratio. NM has recently bought a fleet of smaller ships, which it will use primarily for river traffic in South America. These are supposed to begin adding 35% to EBITDA beginning in Q4. This stock has been beaten down lately, so it is an especially good buy. It is both a value and a growth play. In addition NM should not have too much competition in the river traffic segment.
    Further dry bulk shipping in general got a recent lift from RTP inking an iron ore price contract for this year with both a major Chinese steel manufacturer and Nippon steel. This was for an almost double price increase over last year. This should engender dry bulk rate increases. I believe other iron ore agreements will be sign soon with BHP, etc. This should further lift the Baltic Dry Index. Also the Chinese have been restricting polluting industries (coal and iron ore especially) in anticipation of the Olympics. Q3 and Q4 are normally the hot quarters for shipping. After the Olympics look for shipping to China to pick up for both reasons. NM should do great. I believe most dry bulk shippers will do well.
  •  
    David White
    Jul 07 10:48 AM
    stumpy: NM has an excellent PE and FPE. IT also has an excellent Price to Book Value ratio. NM has recently bought a fleet of smaller ships, which it will use primarily for river traffic in South America. These are supposed to begin adding 35% to EBITDA beginning in Q4. This stock has been beaten down lately, so it is an especially good buy. It is both a value and a growth play. In addition NM should not have too much competition in the river traffic segment.
    Further dry bulk shipping in general got a recent lift from RTP inking an iron ore price contract for this year with both a major Chinese steel manufacturer and Nippon steel. This was for an almost double price increase over last year. This should engender dry bulk rate increases. I believe other iron ore agreements will be sign soon with BHP, etc. This should further lift the Baltic Dry Index. Also the Chinese have been restricting polluting industries (coal and iron ore especially) in anticipation of the Olympics. Q3 and Q4 are normally the hot quarters for shipping. After the Olympics look for shipping to China to pick up for both reasons. NM should do great. I believe most dry bulk shippers will do well.
  •  
    David White
    Jul 07 10:49 AM
    stumpy: NM has an excellent PE and FPE. IT also has an excellent Price to Book Value ratio. NM has recently bought a fleet of smaller ships, which it will use primarily for river traffic in South America. These are supposed to begin adding 35% to EBITDA beginning in Q4. This stock has been beaten down lately, so it is an especially good buy. It is both a value and a growth play. In addition NM should not have too much competition in the river traffic segment.
    Further dry bulk shipping in general got a recent lift from RTP inking an iron ore price contract for this year with both a major Chinese steel manufacturer and Nippon steel. This was for an almost double price increase over last year. This should engender dry bulk rate increases. I believe other iron ore agreements will be sign soon with BHP, etc. This should further lift the Baltic Dry Index. Also the Chinese have been restricting polluting industries (coal and iron ore especially) in anticipation of the Olympics. Q3 and Q4 are normally the hot quarters for shipping. After the Olympics look for shipping to China to pick up for both reasons. NM should do great. I believe most dry bulk shippers will do well.
  •  
    OrangeValueI
    nvestor
    Jul 08 03:33 PM
    Dont you think gaz price will affect their bottom line massively ???
  •  
    getthefactss
    traight
    Jul 18 04:51 PM
    billf921 (alias of audioFOOL)

    You've been preaching your doom and gloom scenario on the EXM board and others and evidently as a short you'd like to believe what you post, but just the opposite of what you say is true. They're will be a shortage of ships thru the end of 2009 at least and probably well into 2010 which augers well for higher rates.

    Your criticism of a well documented article confirms you have no idea what you're talking about.
  •  
    morgan77
    Jul 24 12:51 PM
    TBSI as a leader--
    A little more support for the TBSI rally-
    James RevShark DePorre called it a market leader today in his podcast on greenfaucet.com. He also named EXM and GNK as stock picks.
    Just wanted to let you all know that now is the time to get in if you haven't already.
    You can listen on the site under podcasts if you want more info (he talks about the market generally too)
  •  
    morgan77
    Jul 24 12:51 PM
    www.greenfaucet.com/sh...
  •  
    morgan77
    Jul 24 12:52 PM
    www.greenfaucet.com/sh...


    On Jul 24 12:51 PM morgan77 wrote:

    > TBSI as a leader--
    > A little more support for the TBSI rally-
    > James RevShark DePorre called it a market leader today in his podcast
    > on greenfaucet.com. He also named EXM and GNK as stock picks.
    > Just wanted to let you all know that now is the time to get in if
    > you haven't already.
    > You can listen on the site under podcasts if you want more info (he
    > talks about the market generally too)
  •  
    wpdragon
    Aug 10 12:32 PM
    hey getthefactsstraight... congratulations... you've now been totally incorrect on TWO boards, yahoo and now here. Audio has nailed the drybulker weakness while your naive pollyanna cheerleading has been totally off course. Way to go!
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