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DryShips Inc. (DRYS), Diana Shipping Inc. (DSX): Avoid This Sinking Ship

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DryShips Inc.The shipping industry has been struggling since the financial crisis of 2008. The industry is negatively influenced by factors such as low economic performance, consumption and production that drive the demand and supply of goods and raw material. DryShips Inc. (NASDAQ:DRYS) was once an industry leader before the sub-prime crisis, but now it is in worse condition than its industry peers. Let’s discuss the main reason behind the failure of DryShips Inc. (NASDAQ:DRYS).

Business model

DryShips Inc. (NASDAQ:DRYS) is engaged in the transportation of dry bulk and petroleum cargoes globally. Its industry peers like Diana Shipping Inc. (NYSE:DSX) and Nordic American Tanker Ltd (NYSE:NAT) are operating in a single segment. Diana Shipping Inc. (NYSE:DSX) is only involved in the transportation of dry bulk cargoes, including commodities like iron ore and coal, while Nordic American Tanker Ltd (NYSE:NAT) is engaged in acquiring and chartering of Suezmax tankers only.

DryShips Inc. (NASDAQ:DRYS) is already losing money from the dry bulk segment due to decline in book orders, but now the price of crude oil is rising. The increasing price level will negatively affect DryShips oil tanker segment in the future. The diversification of DryShips in both the dry bulk and the oil tanker business is good, but not during the recession. The diversification will be helpful for DryShips Inc. (NASDAQ:DRYS), only if the demand for both the dry bulk and the oil tanker vessels will improve simultaneously. This seems difficult as the price of crude will continue to rise because of the increasing cost of extraction. The demand for dry bulk ships will also reduce as China is now trying to reduce coal consumption by using alternative sources to generate electricity.

Rising crude oil prices

The current price of crude oil is $105 per barrel, which jumped from $97 per barrel a month earlier. The U.S. Energy Information Administration (EIA) expects that the price for crude oil will average $108 per barrel in 2013. The cost of oil extraction is also rising and it is projected that world oil production costs are increasing at about 9% per year. This depicts that the crude oil price will further rise. The rise in crude’s price will negatively affect DryShips Inc. (NASDAQ:DRYS) as the increasing fuel prices lead to high shipping costs. As a result, Shipping firms often pass on oil price charges to its customers which in turn will reduce the demand for ships.

The rise in crude oil price will negatively affect the DryShips tanker segment. As the price is rising, the demand for crude oil will decrease because the consumers will not be motivated to buy oil at a higher price. The poorer demand will in turn reduce oil imports, which will reduce shipping rates. The rise in crude oil price will significantly disturb Nordic American Tanker Ltd (NYSE:NAT) because it operates oil tankers while Diana Shipping Inc. (NYSE:DSX) will not be affected by the increase in the price level.

Increasing coal demand

Shipping rates have increased due to higher demand for coal, especially in China, but the increase is due to seasonal factors. In China, the demand for coal increases in March and July through August because of amplified demand for electricity in summer. Demand for the electricity rises because people use air conditioning or heaters to live comfortably throughout the cold winter and the hot summer. But as the weather becomes milder, the demand for electricity will fall, which in turn will reduce the imports of thermal coal and the shipping rates.

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