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DryShips Inc. (DRYS), Diana Shipping Inc. (DSX): Are We in a Dry-Shippers’ Bull Market?

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Plagued by overcapacity, dry shipping rates for things such as iron ore, grains, and coal have taken quite a beating the last few years. Stock prices of many shipping companies have likewise plummeted to record lows. Some of them now trade at a fraction of their book values as low rates make it difficult for shippers to turn a profit. However, that grim situation may now be changing for the better.

DryShips Inc. (NASDAQ:DRYS)

Huge surge in shipping rates
The Baltic Dry Index, which measures the dry-shipped goods’ shipping rates by sea, saw a 19% jump last week — the biggest jump in more than two years. So far this week it’s looking like another record — up another 20% as of September 12 for a 43% rise in just the last two weeks. Demand for iron ore out of China seems to be causing surge, and China’s seasonally strongest period for the commodity doesn’t even begin until October. Soy and grain exports have been predicted to rise through the end of the year as well, according to US Department of Agriculture. If that proves true, expect shipping rates to keep rising.

How to invest in response to surging shipping rates
All other things being equal, every additional dollar in shipping rates falls directly to a shipper’s bottom line. Rising rates can make an enormous impact on shipping companies’ financials; just as falling rates hurt them, rising rates can make them go right back up.

DryShips Inc. (NASDAQ:DRYS) is easily the most famous dry shipping compnay, and perhaps one of the least risky ways to invest in shipping. Over 75% of its sales as of last quarter actually come from its drilling business. Analysts already expect the company’s 2014 to be well into the black, so any extra rate increases should make a material percentage increase in its bottom line. DryShips Inc. (NASDAQ:DRYS) currently trades at less than half book value. Before the collapse in 2008, it traded as high as over $100 per share.
Diana Shipping Inc. (NYSE:DSX) is pure investment in dry shipping. The company transports dry bulk cargoes worldwide, including commodities such as iron ore, coal, grain, and other materials. Analysts have yet to respond to the rate increases, but no doubt more of them will be raising their 2014 EPS estimates shortly. Diana Shipping Inc. (NYSE:DSX) trades around 20% below book value now; back in its heyday, it traded north of $40 per share.
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