The Other Side of Ship-Borne Cargoes

Sean Brodrick By Sean Brodrick,

Commodities

I have told the story of tanker stocks many times – how I feel they’re a great way to play depressed oil prices. But man, the other side of ship-borne cargoes is floundering. I’m talking dry bulk shippers – the ships that carry iron, grain and other dry goods around the globe.

The Baltic Dry Freight Index (BDI), which tracks a composite group of rates for different sizes of bulk carriers, jumped 115% from February through mid-July. That’s certainly raising some eyebrows. So, is it time to buy beaten-down shippers? Especially when they look SO cheap. And some pay hefty dividends, too.

This isn’t simple, but there is an answer. Bear with me.

First of all, sure, the BDI did jump this year. But it collapsed 95% in 2008, and has spent the intervening years struggling.

Baltic Dry Freight Index chartThe collapse came due to the global recession, sure. Before that, the Chinese had been buying everything that wasn’t nailed down, and shipping rates soared.

Something else happened: Shipping companies, with dollar signs in their eyes, ordered a bunch of new ships. Those ships started to be delivered in – you guessed it – 2008.

Suddenly, there was a surplus of ships just when they weren’t needed. And that’s why rates punched a hole in the bottom of the dry bulk shipping business.

Slowly, the global economy started to recover. China started to buy bulk goods again. But now there was a huge fleet of dry bulk ships. And those ships are built tough – the surplus didn’t go away.

Now we’re seeing a rally. Maybe the surplus ended this year. Maybe.

But something else happened. China started buying humongous amounts of corn.

China’s corn imports in June came in at 872,919 metric tons – up nearly thirtyfold from a year ago. China imported 2.65 million tons in the first half of the year. That’s nearly double the volume for the same period last year.

China Corn Imports Soaring chartAt this pace, China will import a record amount of corn this year.

China is buying a lot of corn from the Ukraine. It’s probably using the advantage of currency differentials to reload its warehouses on the cheap.

Now, that’s not the only force at work. I also chatted (emailed, actually) with Briefing.com’s Senior Commodities Trader Mike Ciccarelli.

He said that sure, “You can rent a capesize ship for $15,466 per day on the spot market, which is up from the cost on February 18 of $5,447 per day.”

Mike said that some older ships were retired, lowering the surplus. A rally in iron ore prices from April through June also helped drive up shipping rates.

However, Mike added, “Since that rally above $60 per metric, iron ore prices have pulled back hard.”

So, Mike added, what we may be seeing is a delay between commodity prices and the BDI index. Once it catches up, prices could fall hard. “Ultimately,” he added, “we should be concerned that the recent rally in dry bulk rates will prove to be unsustainable.”

To that I have to add that, given the collapse we’ve seen in commodity prices – especially oil and metals, driving the Bloomberg Commodity Index down to hit a 13-year low last week – I think that the potential rally may have run its course.

Sure…

Navios Maritime Holdings (NYSE: NM) pays a 6% dividend and seems to be rallying off its lows. Baltic Trading (NYSE: BALT) sports a 2.8% yield. These, along with Diana Shipping (NYSE: DSX) and DryShips (NYSE: DRYS), seem to be putting in bottoms. They trade at big discounts to book value – in DRYS’ case, just 0.13 times book value. That seems insane if the ships aren’t actually sinking.

But I think this is a siren song that could lure unwary investors to the doom of getting no return on investment… and maybe even lower prices yet to come.

A Better Alternative

Dry bulk shipping may be lost at sea (for now), but oil and products shipping still looks good. I’ve made the case for oil tankers many times, and I continue to do so. Some of those stocks even look cheap, if they were Greek companies pounded lower by the recent crisis in that country.

Do your own due diligence before you buy anything.

All the best,

Sean