I played a similar sector, the oil shipping stocks about 2-3 years ago and that turned out pretty badly for the sector - the theme being as oil prices rise (from then $40? crude) that the dayrates for oil ships must rise; now we have a similar thesis for all other non oil commodities - as world trade rises so must the dayrates of the dry bulk ships - thus far it has held true, just as it held true (for a while) in the oil shippers before supply caught up to demand and their day rates fell. Hence I have been a bit reluctant to get on this bandwagon, but the stocks have just been on a tear. I am not sure if at this point this is an overcrowded trade but at this point, everything in the commodity space seems to be a bit overcrowded. That doesn't mean it cannot CONTINUE to be overcrowded for an indefinite amount of time...
- If anyone knows about the perfect storm, it's dry-bulk shipping companies that ply the Seven Seas. They haul iron ore, coal, grains and other bulk commodities.
- Thanks to a convergence of factors -- including the growing needs of China and other developing nations -- they're also raking in more cash than ever. Charter rates are at record highs.
- Citing a massive urban infrastructure project just getting underway in 62 second-tier cities in India, he said the need for steel and concrete will explode over the next several years.
- Iron ore is needed to make steel, and prices are already at record highs. Shipping titans say industry buzz has iron ore rates going up 20% to 25% next year.
- Demand for iron ore certainly isn't slowing elsewhere, either. China continues to suck in much of the available supply from key source countries such as Brazil and Australia, leaving many other customers scrambling for what's left.
- The supply crunch often means customers must tap into more distant sources, meaning longer ocean voyages -- and more revenue -- for shipping firms.
- China also became a net importer of coal for the first time this year. In itself, that's good news for dry-bulk business. Also, like iron ore, coal customers besides guzzler China are pressed to bring in supplies from longer distances than usual.
- "Charter rates are setting all-time highs on a daily basis," said Douglas Mavrinac, managing director and lead maritime analyst at Jefferies. The average spot rate for large capesize ships averaged $150,000 a day last week, while smaller panamax boats fetched an average $75,000 per day on the spot market, according to Jefferies.
- While its outlook on the crude oil and product tanker market is cautious over the next two years, Jefferies' view of the dry-bulk shipping market over that time is favorable.
- Port congestion is adding to the vessel supply crunch. The long waits to unload in ports has reduced dry-bulk vessel capacity by more than 11%, said Diana Shipping (DSX) President Anastassis Margaronis.
- To keep up with demand, dry-bulk operators are stepping up ship orders. In July, Eagle Bulk announced it would spend $1.1 billion to buy 26 new supramax vessels -- the smallest type of dry-bulk ship, for delivery starting next year through 2012. The firm acquired 39 other ships in the last two years for $1.5 billion.
- Since overcapacity is an ongoing concern in the dry-bulk business, the higher number of deliveries slated for 2009 and 2010 caused some to question the potential for rate drops. But shippers waved away the concerns.
- Not all of the boom in business comes from iron ore and coal. TBS transports all kinds of dry cargo, from fertilizer to finished steel. TBS's Royce said renewals from customers are "at higher (rate) levels than anytime in the past."
- Jeffries' Mavrinac says rates will keep climbing through 2007, and that 2008 rates should be higher than in 2007. Since they are more volatile, spot rates are typically higher than fixed rates. For now, firms that have more spot-rate exposure, such as DryShips, can "maximize their returns," Mavrinac said. DryShips' Chief Executive George Economou said 98% of the firm's fleet next year will be left unfixed "to take advantage of the strong environment."
- Genco Shipping (NYSE:GNK) is in the middle. It uses a balanced approach of both spot and fixed contracts.
- Quintana's (QMAR) Molaris said his company has been criticized for its emphasis on fixed-time charters "in this boom market." But he said, "We run the company to minimize market risk. We have significant upside potential for the risk we take."
- Eagle Bulk also has a higher degree of fixed charters than spot-rate deals. But since renewals are likely to be priced at higher levels, as Mavrinac says, the company isn't shifting gears. "This is the first time I've seen in my career charterers coming to us and asking for packages," Eagle Bulk's Zoullas said. "Charterers are saying, 'Give us more years.'"
Takeaway: Unlike the shipper's CEOs I don't think its wise to just 'wave away' concerns of oversupply (they aren't biased are they?). With that said it appears the next 12-18 months should be pretty secure in terms of continued undersupply of ships in the market so for a shorter term holding period (less than 2 years) there should be opportunities here. It appears the market really favors DryShips (DRYS) due to its 'unhedged' nature - i.e. not locking in long term rates to take advantage of the spot market. The fund still holds no positions in this sector but it could be an interesting play.
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Below from "late to the game" Guy Adami (i.e. where were you on this sector 6 months ago Guy?) :)
- DryShips (DRYS), according to its website, is "a global shipping transportation company specializing in the transportation of dry bulk cargoes. Its vessels are able to trade worldwide in a multitude of trade routes carrying a wide range of cargoes for a number of industries". The Street has liked the story in a rather large way this year. DRYS is up over 400% since starting the year trading around $18.00.
- After a move of that magnitude it would be logical to think that things at DRYS are a tad rich on a valuation basis. But upon further review, valuations aren't all that frothy. As a matter of fact, at 14.75 times trailing and 8.70 times forward earnings, DryShips is actually cheaper than Excel Maritime Carriers (EXM), which trades around 21.50 times trailing and 11.50 times forward earnings and Diana Shipping (DSX), which trades at 19 times and 12 times respectively.
- Of course demand out of China has been a huge driver for the resurgence of the industry. For the first time this year, for example, China has become a net importer of coal. But China is not the only story. The infrastructure build out in India has been historic as well and its appetite for steel and concrete shows no signs of slowing. Demand in India is so great that some industry experts predict that port capacity must increase by 130%.
- Working in favor of DryShips, according to its CEO George Economou, is that 98% of the firm's fleet prices next year will be left unfixed. In the current conditions and foreseeable future, for that matter, spot rates have been running higher than fixed rates. As a matter of fact, Jefferies just raised its price target to $100 from $80 in part based on that pricing structure.
- Now with DRYS up about 32% since September 17 alone, I think we are in the "froth" stage of trading and I am looking for a pullback. But the macro story for DryShips is very much intact.
Again, it sounds a bit crowded and in fact the Guy Adami post sounds vaguely familiar (err, almost verbatim in spots) to the Investor Business Daily piece. I do agree with Guy that we are in the frothy stage in this space; in fact in much of the commodity space, but who is to know where/when it ends and begins some sort of pullback. At this point the animal spirits of the market seem to have no end in sight. Even perma bull Cramer was calling for a pullback middle of last week, a pullback that never came. There is a whole pantheon of names in this secotr but DryShips seems to be the stock the traders favor in this market; and heck with a name like "Dry""Ships" even the least astute investor can figure out the theme of the company.
With that said, just today an analyst was out upgrading the sector and raising estimates, for example DryShips 2007 estimates increased from $7.75 to $9.48, and 2008 from $10.81 to $12.48; and Excel Maritime Carriers 2007 estimates from $3.65 to $4.43 and 2008 estimates from $5.35 to $7.05.
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