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The fourth quarter was kind to dry-bulk shipping
companies. With rates for their services
reaching levels not seen since before the crash,
dry bulkers will likely post strong profit and
cash-flow numbers when they go public with their
quarterly results later in February.
Indeed, for
a brief moment in October, a few ship owners
were lucky enough to book their capesize ships
on the spot market for voyages paying $100,000 a
day. Though six-figure rates were hardly the
norm -- on average across the fourth quarter,
capesize vessels scored day rates of about
$45,000 on the spot market -- that's still well
above the levels indicated by the hedging
instruments used by the shipping industry. The
derivatives known as forward-freight agreements,
or FFAs, had called for average rates in the
fourth period of about $35,000 a day.
More to the point: $45,000 is more than enough
for profits to roll in at a fine pace for
shipping companies. Anything above $50,000 is
considered historically strong, and enough to
drive stock prices higher.
Still, as all dry-bulk investors know, stocks
prices in the sector rarely move one way or
another based on earnings reports alone.
Analysts for the most part have a clear view of
how much money each company will make in a given
three-month period, since publicly traded
shipping outfits, more conservative than their
privately held peers, rent out most of their
vessels under long-term charter contracts at
fixed rates. Private ship owners, ruled largely
by magnates in Greece and Norway, are much freer
to roll the dice on the spot market.
Quarterly results, therefore, are to some ways
of thinking beside the point when it comes to
dry-bulk stocks.
Instead, the supply-demand prognosis looms the
largest for investors.
On the demand side, everyone is trying to divine
whether China's recent credit tightening will
slow the blast furnaces of the world's largest
steel-producing nation -- and, if so, to what
degree. So furiously have those Chinese plants
consumed iron ore in their rage to forge steel
that, through most of 2009, the People's
Republic almost singlehandedly saved the
dry-bulk business from the devastation suffered
by other merchant-marine sectors, most notably
container ships.
Over the short term, the outlook for iron-ore
demand looks to remain robust, many analysts
say. They base their bullish view on the April
deadline for annual negotiations between Chinese
steel interests and the world's big three iron
ore miners -- BHP Billiton, Rio Tintoand Vale.
Because contract prices are expected to jump,
China's mills may look to buy up as much iron
ore as possible before a deal is struck in
April, stocking up when prices remain relatively
cheap.
On the other hand, shipping rates weakened
sharply during the second half of January,
before stabilizing the last few days. Many have
attributed the falloff to declining Chinese
steel prices, or fewer shipments into China
ahead of the national New Year's holiday, but
the decline was steep enough to cause
broader-based concerns.
On the supply side, the great worry remains the
orderbook, which continues to cast a dense
shadow over stock prices. Dry bulk observers --
from ship owners to brokers to shareholders --
will be paying attention to dry-bulk earnings
reports in at least one significant way:
checking to see how many orders for new vessels
these companies have scratched, thus reducing
future supply. The prevalent feeling is that
owners will need to annul (or at least delay)
30% to 40% of the ships on order for delivery in
2010 to keep the supply-demand balance intact
and future rates steady.
But some analysts note that heavy port
congestion -- nearly 60 ships have been waiting
to pick up coal at the Australian port of
Newcastle -- could help soak up the
incrementally increasing number of dry-bulk
ships on the oceans. Then there's the phenomenon
of "ton-mile expansion," which refers to the
increasing distances that ships must travel
between pick-up and delivery, as South American
mines supply more and more raw materials to
China, as opposed to Australia.
It's true that dry-bulk shares often move in
tandem, since, at bottom, business is the same
from company to company. There isn't much brand
differentiation, in other words. Still, company
specifics do matter. With that in mind, here's a
look at five popular dry-bulk outfits --
DryShips, Diana Shipping, Genco Shipping &
Trading, Excel Maritimeand Navios Maritime
Holdings -- and where they stand as they finish
out the first quarter of 2010.
Source: TheStreet
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